Risk assets are holding onto supports ahead of US/North Korea Summit
Kelvin Wong June 11, 2018 12:07 PM
USD/JPY, Nikkei 225 and MSCI Emerging Markets (EEM) may have a significant movement on the outcome of the U.S/North Korea Summit.
The highly anticipated “on-again-off-again” meeting between U.S. President Trump and North Korean leader Kim Jong-un will finally take place tomorrow in Singapore at a scheduled timing of 9 a.m (SG time). This is a historical meeting as a successful outcome will lead to a denuclearization of the Korean peninsula and in return the lifting of trade and economic sanctions on North Korea with a possible peace treaty that ends the Korean War that is still technically in place since July 1953. In addition, geopolitical tensions could also ease in the North Asian region with the removal of U.S.’s nuclear umbrella programme that is protecting its allies South Korea and Japan.
Given U.S. President Trump’s “unpredictable” style of handing international relations and previous hawkish rhetoric comments from his national security advisor, John Bolton that insisted on a “Libya Model” for North Korea that calls for a complete nuclear disarmament before peace talks can take place. The "Libya Model" has spooked Kim Jong-un to recall the fate of former Libyan leader Gaddafi who was slayed by his opponents after an agreement that was reached in December 2003 for Libya to abandon its nuclear programme in exchange for the lifting of economic sanctions. Therefore, an immediate peace deal to be signed between U.S. and North Korea seems like a low probability outcome in tomorrow, 12 June summit. The most optimistic outcome as per quoted by foreign policy experts in media outlets is a “laying of ground works” style for future meetings to take place. The wild card is a worst-case scenario where Trump walks away from the meeting ahead of schedule and starts to tweet harsh remarks on Kim.
From a technical analysis perspective, risk sensitive related assets have been holding firm ahead of the U.S/North Korea Summit even trade tensions between U.S. and its allies remain “on fire” after Trump’s refusal to endorse the recent G7 Summit’s communique statement. Let’s us now look at the charts of USD/JPY, Nikkei 225 and MSCI Emerging Markets (EEM) that may have a significant movement on the outcome of the U.S/North Korea Summit.
USD/JPY – Medium-term uptrend remains intact
Key levels (1 to 3 weeks)
Intermediate support: 109.05/108.90
Pivot (key support): 108.30/107.80
Resistances: 110.60, 111.40/60 & 112.00/30
Next supports: 105.60 & 104.65
- The recent pull-back of 120 pips from its 110.26 minor swing high of 06 Jun 2018 is now coming close to the lower boundary of a medium-term ascending channel from 26 Mar 2018 low now acting as a support at 109.05/108.90 (see 4 hour chart).
- The daily RSI oscillator remain positive at it has tested, staged a rebound from a significant corresponding support at the 42 level and continued to hold above it. These observations suggest that the medium-term upside momentum of price action remains intact.
- The key medium-term support rests at 108.30/107.80 which is defined by the former medium-term swing low area of 07 Sep 2017 that was rejected on 21 Feb 2018 and 50% Fibonacci retracement of the up move from 26 Mar 2016 low to 21 May 2018 high of 111.40.
- The recent pull-back of USD/JPY has reached a significant inflection zone coupled with positive medium-term momentum reading where another round of potential impulsive upleg may materialise after the risk of a residual push down in price action as the shorter-term 4 hour Stochastic oscillator has almost reached an extreme overbought level of 96.
- Therefore as long as the 108.30/107.80 key medium-term pivotal support holds, the USD/JPY is likely to shape another round of potential upleg to retest the intermediate resistances of 110.60 and 111.40/60. A break above 111.60 opens up scope for a further rally to target the 112.00/112.30 major resistance (the descending trendline in place since Jun 2015 and Fibonacci retracement/projection cluster). However, failure to hold at 108.30/107.80 invalidates the bullish scenario for a multi-week corrective decline towards the next support at 105.60 (03 Apr 2018 minor swing low & the close to the major primary ascending trendline support from 20 Jun 2016 low).
Nikkei 225 – A direct correlation play with USD/JPY
Key levels (1 to 3 weeks)
Intermediate support: 22550
Pivot (key support): 22000
Resistances: 23020 & 23600/700
Next supports: 21360 & 21000
- The movement of Japan 225 Index (proxy for the Nikkei 225 futures) has a direct correlation with the USD/JPY. A seen from its 4 hour chart, the Index has been evolving in a similar medium-term ascending channel in place since 23 Mar 2018 low of 20328 (see 4 hour chart).
- Medium-term momentum reading remains positive as the daily RSI oscillator has continued to inch higher after a test and rebound from its corresponding support at the 44 level. In addition, it still has room for further upside before it reaches an extreme overbought level of 83.
- Key medium-term support rests at 22000 which is defined by the former congestion area of 13 Mar/10 Apr 2018 and the 38.2% Fibonacci retracement of the on-going medium-term up move from 23 Mar 2018 low to the recent 23050 high of 21 May 2018.
- As long as the 22000 key medium-term pivotal support holds, the Index is likely to shape a further push up to retest 23020 (the 21 May 2018 minor swing high area) before targeting the next resistance at 23600/700 (the upper boundary of the aforementioned medium-term ascending channel & 0.618 Fibonacci projection of the up move 23 Mar 2018 low to 21 May 2018 high projected from 29 May 2018 low) (see 4 hour chart).
- However, failure to hold at 22000 shall invalidate the medium-term uptrend to kick start a multi-week corrective down move towards the next supports at 21360 and even 21000 next (61.8%/76.4% Fibonacci retracement of the up move from 23 Mar low to 21 May 2018 high & the primary major ascending channel support from Jun 2016 low).
MSCI Emerging Markets ETF (EEM) – A potential relief rebound around the corner
Key levels (1 to 3 weeks)
Pivot (key support): 45.00
Resistances: 48.40 & 50.18
Next support: 41.00 (long-term pivot)
- The MSCI Emerging Markets exchange traded fund (ETF) (ticker code EEM) that is listed in the U.S. stock market is a benchmark index that comprises of emerging market stock markets. The recent underperformance of emerging market stock markets against the rest of world where the EEM had plunged by 13% from since the start of the 2018 to print a low of 45.03 in 09 Feb 2018 had failed to make any significant recovery. One of the main fundamental drivers that caused this underperformance is the risk of further global tightening conditions where the European Central Bank (ECB) may start to announce an exact date to end its on-going quantitative easing programme on its upcoming monetary policy decision on Thurs, 14 Jun after hawkish comments from ECB officials heard last week.
- In past 3 weeks, Brazilian, Mexican and South African stocks suffered sharp sell-offs but their combined weightage consist of only 14% versus a significant combined weightage of 48.5% that comprises of China and South Korea stocks. Thus, the outcome of the U.S/North Korea Summit will have a significant impact on the MSCI Emerging Markets ETF (EEM) in the near-term.
- The recent pull-back of the EEM has reached a key medium-term support level of 45.00 which is defined by the lower boundary of a medium-term ascending channel in place since Jan 2016 low and the former major range resistance from Feb 2012/Sep 2014.
- The daily RSI oscillator has traced out a bullish divergence signal and remains on support at the 37 level despite its price action that has continued to shape “lower lows” since 23 Mar 2018. These observations suggest that medium-term downside momentum has started to abate.
- As long as the 45.00 key medium-term pivotal support holds, the EEM may see a potential medium-term rebound to retest its intermediate resistances at 48.40 follow by 50.18 next (see daily chart).
- On the other hand, failure to hold at 45.00 shall see a further decline to test the key long-term pivotal support at 41.00 (the pull-back support of the former major “Symmetrical Triangle” range resistance from Oct 2017 high) (see weekly chart).
Charts are from City Index Advantage TraderPro & eSignal