Multiple Factors in Play as Currencies Await Clearer Directions

The forex markets are relatively quiet in range today as multiple factors are having conflicting impacts. Asian equities continue to diverge from the US stocks, as weighed down by trade worries. While Yen is mildly firmer today, it’s the second weakest for the week, following Swiss Franc. Strengthen in US and European yields countered the positive effect of risk aversion on Yen. Sterling is back in consolidative mode after the Brexit lift faded rather quickly. Euro also turned mixed. But Canadian Dollar surges broadly, firstly as helped by WTI crude oil’s breach of 70, and secondly, as there were positive words from Trump on trade talks. What’s clearest is that Australian and New Zealand Dollar are weak, due to risk aversion, trade threats, yield gap, as well as monetary policy divergence with others.

Major US indices closed higher overnight with DOW gained 0.44%, S&P 500 rose 0.37% and NASDAQ rose 0.61%. Treasury yields staged a strong rally too. 5-year yield rose 0.041 to 2.869, 10-year yield rose 0.040 to 2.977, 30-year yield rose 0.036 to 3.124. Asian stocks are weak, with Nikkei down -0.46% at the time of writing. Hong Kong HSI is down -0.40%. Singapore Strait Times is down -0.11%. China Shanghai SSE is currently down -0.33%. More importantly, SSE hit as low as 2647.17 earlier today, and has already breached August low at 2653.11. Key support level of 2638.30 (2016 low) is within touching distance. Gold gyrates lower as consolidation from 1214 extends.

Technically, despite yesterday’s strong rally, USD/JPY is still held below 111.75/82 resistance zone. This resistance zone will remain a focus today and decisive break will resume the rebound from 109.76 towards 113.17 high. USD/CHF is also eyeing 0.9766 resistance to confirm short term reversal. EUR/USD is holding above 1.1525 support, which remains a focus too.

Enough is enough, US industry group coalition launches new campaign against Trump’s tariffs

Over 60 US industry groups formed a coalition “Americans for Free Trade” to launch a campaign against Trump’s abusive use of tariffs and trade policies. Business groups have already expressed they objections to the tariffs on USD 200B of Chinese goods in the public hearing that ended last week. But instead of listening to what the Americans said, Trump raised the stakes last Friday by warning that tariffs on another USD 267B in Chines imports are “ready to go on short notice”.

The coalition involves almost every sector of the US economy, with heavy weight names represented including Exxon Mobil Corp and Chevron Corp, Target Corp and Autozone Inc., Microsoft Corp, Google owner Alphabet Inc and Apple Inc., Amazon.com, Macy’s Inc and Walmart Inc., IBM Corp and Facebook Inc., Mattel Inc, Hasbro Inc and Barnes & Noble Inc., etc.

Matthew Shay, president of the National Retail Federation, who is helping lead the coalition group warned that “there has been no sign of progress in the talks or de-escalation, simply more rhetoric about increasing tariffs, that’s not going to be good for the economy.” Nicole Vasilaros, the top lobbyist for the National Marine Manufacturers Association, also said the layering effect (of tariffs) has finally gotten everyone to say: ‘Enough is enough.'”

The campaign includes reaching out to lawmakers, buying ads and hosting town hall style meeting in swing states. Also, the coalition is targeting lawmakers in five states as the first step, including Ohio, Pennsylvania, Illinois, Indiana and Tennessee. And, it’s planned to expand to a dozen states by the end of the year.

In a letter to members of Congress, the coalition said “we also strongly encourage Congress to exercise its oversight role on trade policy matters to prevent further harm to U.S. workers, consumers and families that will result from new tariffs — both those already being implemented and future tariffs that have been proposed.”

Canada-US trade talks continue in good faith, but nothing is done until everything is done

Canadian Dollar is apparently lifted after Trump said the trade talks continue “in good faith”. And, Trump is open to include Canada in the US-Mexican agreement but noted that “they want to make a deal very much”, but if we don’t make it, that’s okay too”.

Foreign Minister Chrystia Freeland returned to the US and met USTR Robert Lighthizer yesterday, to resume the trade talks. Afterwards, she said the was a positive atmosphere during the meeting. And, “both sides did a lot of thinking over the weekend, so this was a very productive meeting.” But she also emphasized that ” nothing is done until everything is done.”

Meanwhile Reuters reported quoting unnamed source that Canada is ready to have concessions on dairy. But in return, it would request US concession on Chapter 19 dispute resolution mechanism.

Canada collected nearly CAD 300m in tariffs after starting retaliation on US steel and aluminum tariffs. Finance Ministry spokesman pledged that the money will be funneled back to the industries hurt by Trump’s tariffs. He said “we are committed to making sure that every dollar raised in reciprocal tariffs is given back in the form of support for affected sectors.”

UK Hammond said Brexit deal do-able in 6-8 weeks, but will be less detailed

Yesterday, UK Chancellor of Exchequer Philip Hammond told upper house of parliament today that a Brexit deal can be agreed in 6-8 weeks with EU. Though, the agreement would be less detailed. He said “there’s merit in having quite a bit of detail, but clearly we don’t have enough time to negotiate the full draft legal text in what will be quite a complex future partnership agreement.”

Hammond’s Treasury also announced earlier that BoE Governor Mark Carney will extend his term till January 2020. Hammond also told MPs that “if we leave the European Union without a deal… we could expect a period when there would be some turbulence and when there would be some issues arising for financial services businesses.” And, “a governor who was leaving at the end of June, with his bags already packed, would be in a poor position to represent the UK in what might be some quite critical – and time critical – negotiations over that period.”

Japan EM Motegi to meet USTR Lighthizer for trade talk on Sep 21

Japanese Economy Minister Toshimitsu Motegi is said to be meeting US Trade Representative Robert Lighthizer on September 21 in the US. That will be a follow up to an inconclusive meeting on trade back in August. Back then Motegi said acknowledged the importance of expanding trade. Also, both sides exchanged views individual areas but nothing had been decided. Earlier this week, Motegi was quoted saying that the US and Japan have some difference in views but will seek to proceed with the discussions.

It’s known that Japan has been insisting in bring the US back to the Trans Pacific Partnership, which Trump pulled out soon after taking office. The multilateral framework is what Japan has been pushing for, which is clearly shown in its leadership role in the TPP too. On the other hand, Trump has been trying to force Japan into bilateral agreement, which he fails o far. It’s uncertain how this fundamental difference could be bridged.

The meeting between Motegi and Lighthizer will precede summit between Japanese Prime Minister Shinzo Abe and Trump on the sidelines of a UN meeting starting September 25.

On the data front

Japan BSI large manufacturing rose to 6.5 in Q3, but missed expectation of 8. Australia Westpac consumer confidence dropped more than expected by -3.0% mom in September. Eurozone will release industrial production today. Canada will release capacity utilization. US PPI and Fed’s Beige Book report will also be featured.

USD/JPY Daily Outlook

Daily Pivots: (S1) 111.22; (P) 111.43; (R1) 111.81; More…

While the rebound from 110.37 was strong, USD/JPY is still limited below 111.75/82 resistance zone. And intraday bias stays neutral first. On the upside, break of 111.73 minor resistance will suggest that the rise from 109.76 is resuming. And intraday bias will be turned back to the upside for retesting 113.17 high. Decisive break there will resume larger rally from 104.62. On the downside, below 110.37 will bring deeper fall. But strong support is expected from 38.2% retracement of 104.62 to 113.17 at 109.90 to contain downside and bring rebound.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.36 support holds. However, decisive break of 109.36 will mix up the outlook again. And deeper fall should be seen back to 61.8% retracement of 104.62 to 113.17 at 107.88 and below.

Economic Indicators Update