Dollar Rebounds after Trump Warns of Very Substantial Tariffs on China

After some initial weakness, Dollar surges broadly today after Trump admitted that he’s not ready to make a deal with China yet. That overturned his repeated comments that a deal could happen soon. Instead, Trump opts for more verbal threats and warned tariffs could go up very substantially and very easily.

Staying in the currency markets, at this point, Sterling looks losing some steam in recovery after UK Prime Minister Theresa May’s resignation. We might see the Pound turns weaker ahead. Swiss Franc and Yen are the weaker ones for today as stock markets recover. However, German 10-year yield is notably weaker at open and is now down -0.012 at -0.126. Falling yields could help provide a base for Yen and Swiss Franc for more upside.

In Asia, Nikkei rose 0.31%. Hong Kong HSI dropped -0.24%. China Shanghai SSE rose 1.38% but failed to regain 2900 handle. Singapore Strait Times is down -0.05%. Japan 10-year JGB yield rose 0.0038 to -0.065. In Europe, currently, DAX is up 0.50%. CAC is up 0.43%. UK is on holiday. German 10-eary yield is down -0.012 at -0.126.

Trump pushes for Japan trade deal very soon, Japan announces new rules to limit foreign investment in tech

Trump was in a trade summit with Japanese Prime Minister Shinzo Abe today, as part of his four-day trip to Japan. In the post meeting joint press conference, Trump said he hoped to announce a trade deal with Japan very soon. He described trade imbalance with Japan as “unbelievable large”. He added “they are brilliant business people, brilliant negotiators and have put us in a tough spot but I think we will have a deal with Japan.” Earlier on before the meeting, Trump said: “Trade-wise, I think we’ll be announcing some things, probably in August, that will be very good for both countries… We’ll get the balance of trade, I think, straightened out rapidly.”

Abe said the two leaders had agreed to accelerate two-way tarde talks. Earlier today, the Japanese government announced new rules to limit foreign ownership of high-tech corporations, effective August 1. The government said that the rule aims at preventing leakage of technology deemed important for national security or damage to defense output and technological foundation.

The new rule is believed to be targeted at China, which was widely accused of the IP theft. However, there is no mention of specific countries or companies that will be affected by such foreign ownership restrictions. Thus, based on the principle of reciprocity, if Japanese steel is security risks to the US, American companies could be risks to Japan too. It’s all up to bilateral relationship and interpretations.

Trump to China: We’re not ready to make a deal, tariffs could go up very substantially, very easily

At the press conference with Abe, Trump said the US isn’t ready to make a trade deal with China yet. He added “I think they probably wish they made the deal that they had on the table before they tried to renegotiate it”. And, “They would like to make a deal. We’re not ready to make a deal.”

Trump also threatened that tariffs on Chinese goods “could go up very, very substantially, very easily.” Though, “I think sometime in the future China and the United States will absolutely have a great trade deal, and we look forward to that,” Trump said. “Because I don’t believe that China can continue to pay these, really, hundreds of billions of dollars in tariffs. I don’t believe they can do that.”

Comments from China remained hard-line over the weekend, a commentary published by the official Xinhua News Agency accused the US of “scapegoating” China for its trade imbalance and domestic economic issues. And, “the United States is attempting to squeeze an unequal trade deal out of China, using measures such as tariff hikes and targeting its tech companies.”

Yuan recovers after China warns of short selling

Chinese Yuan stages on strong rebound today, with USD/CHN breaching below 6.9 handle. Guo Shuqing, head of China’s banking and insurance regulator warned i a speech over the weekend that “shorting the yuan will inevitably suffer from a huge loss.”

He criticized that Trump’s administration is worried about Yuan’s depreciation as that could reduce the impact of higher tariffs imposed on China. At the same time,developed countries have long asked for more currency flexibility. It was “ridiculous” that as Yuan’s exchange rate becomes more market oriented, some people in the US showed fear.

At the moment, we’re not seeing any determination by the Chinese government to block USD/CNH breaking through the psychologically important 7 handle. There might be more verbal interventions. But the aim is seen as for slowing Yuan’s decline, rather than giving it a floor. USD/CNH’s could have formed a short term top at 6.9488. But we’d expect further rise through 6.9800 high after some brief consolidations.

Euro steady as populist attack on EU fails in elections

Euro firms up notably against Swiss Franc in Asian session today, and it’s steady elsewhere. Official projections of European elections showed that efforts from anti parties are failing in the elections. And after the elections, policies of EU will remain largely unchanged. That is, within the bloc, there will be further gradual integration, in particular in Eurozone. Externally, EU will continue to defend multilateral, rule-based global trade system and reject protectionism of the US. Also, there will be no renegotiation of Brexit Withdrawal agreement.

The two large alliances of central-right and center-left lost ground and could only make up 44% of the seats. That’s down from 56% back in 2014. However, pro-business Liberals and the Greens and had a clear surge to 14% and 9% respectively, up from 9% and 7%. That is, together, these pro-EU groups will have around 67% of seat, enough for outright majority, even though it’s down from around 72% in 2014.

Bundesbank Weidmann: Economic outlook is good and no need to change monetary policy

Bundesbank President Jens Weidmann reiterated over the weekend that there was no need for change in ECB policy. He noted despite recent uncertainties, “the economic outlook is good”. And, “we are assuming a rise in price pressures and that’s the condition for monetary policy to normalize.” Also, “this isn’t a situation where prices are falling and we have to react now.”

ECB is set to meet again on monetary policy on June 5/6. Eurosystem staff macroeconomic projections will be released Also, details are expected on the third round of cheap loans to banks, the TLTRO III.

Looking ahead

Canadian events will be the highlights of the week. BoC is widely expected to keep policy rate unchanged at 1.75%. At last meeting, BoC removed chance of rate hike in the near- to medium- term. The central bank also downgraded GDP growth forecast, and lowered the range of neutral rate. For now, we’re not expecting any drastic change in this policy stance. Canada will also release GDP data.

Elsewhere, US PCE will be another important piece of data to watch. Though, China PMIs, Australia private capital expenditure, New Zealand business confidence and Japan industrial production could be more market moving.

Here are some highlights for the week:

• Tuesday: Swiss GDP, trade balance; Germany Gfk consumer sentiment, import prices. Eurozone M3; UK BBA mortgage approvals; US house price index, consumer confidence
• Wednesday: New Zealand ANZ business confidence; Swiss KOF economic barometer; Germany unemployment; BoC rate decisions
• Thursday: Australia building approvals, private capital expenditure; Canada current account; US Q1 GDP revision, trade balance, wholesale inventories, jobless claims, pending home sales
• Friday: Japan Tokyo CPI, unemployment rate, industrial production, retail sales, consumer confidence, housing starts; China PMIs; Swiss retail sales, German retail sales, CPI flash; UK M3, mortgage approvals; Canada GDP, IPPI and RMPI; US personal income and spending, Chicago PMI

USD/CHF Daily Outlook

Daily Pivots: (S1) 1.0003; (P) 1.0023; (R1) 1.0038; More…

USD/CHF’s strong rebound today suggests temporary bottoming at 1.0008, after hitting 61.8% retracement of 0.9879 to 1.0237 at 1.0016. Intraday bias is turned neutral first. On the upside, decisive break of 1.0119 resistance will suggest that decline from 1.0237 is merely a correction and has completed. Intraday bias will be turned back to the upside for retesting 1.0237. That will also retain medium term bullishness in the pair. On the downside, through, firm break of 1.0008 should pave the way to retest 0.9879 key support next.

In the bigger picture, USD/CHF is losing upside momentum ahead of 1.0342 key resistance (2016 high). There is no clear sign of reversal yet. But even in case of another rise, we’d be cautious on strong resistance from 1.0342 to limit upside. On the downside, break of 0.9879 support will suggest that larger rise from 0.9186 (2018 low) has completed. Deeper fall will be seen to 0.9716 support for confirmation.

Economic Indicators Update