US dollar index retraced back to the 96.5 area from 97.0 after Beijing and Washington resumed trade talks for the first time in two months, shifting market focus from Turkey’s currency rout to renewed optimism on trade talks.

This move also allows emerging market currencies and equities room for breath, at least temporarily, as market participants finally see some hope to taper the trade standoff between world’s two largest economies. Things cannot get much worse anyway in the current context.

With 2.9% jump against USD, Lira was leading the gain among emerging market currencies. Euro, Russian ruble, South African rand, Indonesian rupiah and Chinese yuan also stopped bleeding on Thursday as tension moderated. Before the actual trade negotiation takes place at the end of Aug, however, uncertainties remain and markets will probably still suffer from heightened volatility. 

USD/CNH fell the most in more than six months as traders rewinding their short yuan bets ahead of the trade talks to be held sometime next week. Although the overall trend remains upside sloped, traders can monitor momentum indicator such as MACD, RSI and DMI for clues of possible trend-reverse. Its immediate support level lies at around 6.807 (76.4% Fibonacci Retracement).

Asian markets opened sharply lower but erased most of the earlier losses by end of the day as sentiment improved across the board. China technology giant Tencent fell 3% to HKD 325.8 after it reported weaker-than-expected 1Q earnings. Technically, Tencent has already entered into bearish trend and fallen over 30% from its historical high seen in March this year.

Emerging market index has also entered into technical bearish market after falling 20% from its recent peak. In the mid-term, sell-off in EM equities reflect the bearish outlook of EM growth as a result of rising trade risk amid a rate-hiking cycle. Export-oriented EM countries are more vulnerable in a trade war and more susceptible to capital outflow in the raining days.

EM sell-off is also attributed to strengthening in the dollar, and their negative correlation has increased significantly over the past 2 years. We may see more pain ahead if dollar continues to rise and trade conflicts start to erode into the earnings and growth.

Goldprice rebounded to US$ 1,177 after touching 18-month low of US$ 1,160 the day before.

USD/CNH

By Margaret Yang in Singapore

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