Action Insight

Yen jumps sharply this week and is extending it's broad based rally today. There are a couple reasons noted in the markets for the move. The sudden escalation in tension in Middle East, between Qatar and other nations, is seen a a factor. The uncertainties over election in UK is another one. However, we'd believe Yen's strength is more concerned with the outcome of former FBI director James Comey and the impact on US President Donald Trump. And investors are getting increasingly impatient on the lack of progress in Trump's tax reform and economic policies. This is clearly seen in the sharp fall in US bond yields and persistent weakness in Dollar.

Geopolitical uncertainty in the Middle East lifted Australian dollar. A boycott over Qatar is expected to disrupt the country's exports, benefitting its rival, Australia, over LNG exports. Aussie, however, retreated on 'Tuesday, using RBA announcement as an excuse. The central bank reiterated that the global economy continued the "broad-based pick-up", suggested that the domestic economic transition from mining investment has "almost complete" and maintained a neutral tone on the monetary policy. Yet, it remained concerned that low household income growth would constrain consumption. We are skeptical over RBA's forecast that Australia's economy growth would reach+3% p.a. and cast doubt over how long it can refrain from cutting the policy rate further so as to prevent the property bubble.

Aussie stays in tight range today after RBA left cash rate unchanged at 1.50% as widely expected. The central bank also maintained a neutral stance and noted that "the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time." Regarding the economy, the statement pointed out that "year-ended GDP growth is expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the growth figures." But Governor Philip Lowe is optimistic that "economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent."

Sterling recovers mildly today as last Guardian/ICM poll showed that the Conservative is still having 11 pt lead over Labor ahead of Thursday's election. The poll showed that 45% of respondent would vote for Conservatives, unchanged from last week. Meanwhile, 34% would vote for Labour, up 1% from last week. FTSE continues it's negative correlation with Pound and trades mildly lower today, down -0.3% at the time of writing. Technically, 1.2925 minor resistance in GBP/USD and 0.8654 minor support in EUR/GBP will be watched for indication of strength in the Pound.

The forex markets are generally quite quiet today with many European countries on holiday. Nonetheless, Aussie is trading broadly higher as boosted by Chinese services data. Canadian Dollar also strengthens as oil price is lifted mildly by geopolitical news in Middle East. The greenback tried to recovery against Europeans and Yen but lost momentum in early European session. Meanwhile, Sterling showed little reaction to the terrorist attack in London as markets are holding their breath ahead of UK election. Services data are the main focus for today but markets will look through them to key events on Thursday.

Risk appetite in the global financial markets was pretty strong last week. DOW, S&P 500 and NASDAQ shrugged off the much weaker than expected non-farm payroll report from US and all closed at record highs. Strength was also seen in other markets with FTSE 100 in UK and DAX in Germany hitting records too. In Japan, Nikkei also closed above 20000 handle for the first time since 2015. The sharp fall in US yields following NFP argues that markets could be starting to bet on a relatively slower tightening path by Fed and that could be a reason for the strength in US stocks. Eurozone sentiments, on the other hand, was lifted by optimism on easing political risks and improving economic outlook. Meanwhile, UK stocks are riding on the weakening Pound, in particular against Euro.

Dollar dives sharply in early US session after disappointment from employment data. Non-farm payroll report showed only 138k growth in May, well below expectation of 185k. Prior month's figure was revised down from 211k to 174k. Unemployment rate, though, dropped to 4.3%, lowest since 2001. Average hourly earnings grew 0.2% mom, meeting expectation. But prior month's figure was also revised down from 0.3% mom to 0.2% mom. Also released, US trade deficit widened to USD -47.6b in April. Canada trade deficit narrowed to CAD -0.9b in April. Canada labor productivity rose 1.4% qoq in Q1.

Major US indices surged to new record high overnight as boosted by solid ADP job data. Positive sentiments also carry on in Asian session. DOW gained 135.53 pts, or 0.65% to close at 2114.18, a record close even if it's slightly short of record intraday high at 21169.11. S&P 500 rose 18.26 pts, or 0.76% to close at 2430.06. NASDAQ rose 48.31 pts or 0.78% to close at 6264.83. Both were also record close. Nikkei follows in Asia and is trading up 1.4% at the time of writing, at 20140. That's also the first time Nikkei tops 20000 handle since December 2015. Elsewhere, 10 year yield closed up 0.021 at 2.217 but was way off session high at 2.239. Gold struggled to find follow through buying above 1270 again and is back at 1262. WTI crude oil stays soft at around 48.

Dollar strengthens mildly in early US session as lifted by solid job data. The ADP report showed impressive growth of 253k in private sector jobs in May, much higher than expectation of 181k. Mark Zandi, chief economist at Moody's Analytics Inc. described the job growth as "rip roaring". And he noted "the current pace of job growth is nearly three times the rate necessary to absorb growth in the labor force. Increasingly, businesses' number one challenge will be a shortage of labor." Moody's helps ADP produce the report.

British pound volatility has recently increased, not only because the general election is approaching, but also because some opinion polls suggest a hung parliament. The latest YouGov/ Time voting intention survey shows that support for the Conservatives declined markedly to 42% while the Labours gained +3 points to 39%. The 3-point lead by the Conservatives is the narrowest since PM Theresa May has called for the snap election in April. The Liberal Democrats hovered around single-digit, the UKIP remained on 4% and votes for other parties are at 8% (from 7%). Converting percentages to numbers, PM May's Conservative Party, while remaining the biggest party, might lose as much as 20 seats, down from 330 to 310, in the upcoming general election. If the election outcome results in a hung parliament, it would be the second time since 1974, and the seventh time since the beginning of the 20th century.

China's manufacturing activities contracted for the first time in 11 months, as Caixin/Markit's PMI index suggested. The report shows that the manufacturing PMI dropped -0.7 points to 49.6 in May (a reading below 50 signals contraction), compared with consensus of a milder drop to 50.1. While the sub-indices of output and new business remained in the expansionary territory, but both fell to their lowest levels since June last year. Meanwhile, the sub- indices of input costs and output prices drifted to the contractionary territory for the first time since June 2016 and February 2016, respectively. Meanwhile, the sub-index of stocks of purchases showed renewed decline. The rebound in the sub-index of stocks of finished goods suggested that companies stopped restocking as inventory levels increased.

Australian dollar was given a brief boost by retail sales data in Asian session but quickly reversed. It's trading as the biggest loser so far for the day and the week. Retail sales rose 1.0% mom in April, above expectation of 0.3% mom. However, markets seem to be more sensitive to private capital expenditure, which rose a mere 0.3% in Q1, even worse than expectation of 0.5%. Meanwhile, China's private Caixin PMI manufacturing tumbled to 49.6 in May, down from 50.3 and missed expectation of 50.2. That's the first contraction reading in 11 months. Comparing with the official PMI, the Caixin one focuses more on SMEs and indicates that these companies could be under some pressure in May which might drag down the economy ahead.

Euro shrugs off lower than expected Eurozone inflation reading and strengthens against Dollar and Sterling today. EUR/USD is heading back to 1.1267 resistance while USD/CHF is heading back to 0.9691 support. Both currency could be set to resume recent rally against the greenback. Eurozone CPI slowed to 1.4% yoy in May, down from 1.9% yoy and missed expectation of 1.5% yoy. Eurozone core CPI slowed to 0.9% yoy, down from 1.2% yoy and missed expectation of 1.0% yoy. Also from Eurozone, Germany unemployment dropped -9k in May, fewer than expectation of -14k. Unemployment rate dropped to 5.7%. German retail sales dropped -0.2% mom in April.

Sterling weakens mildly as a new poll indicates that Prime Minister Theresa May's Conservative could fall short of an overall majority in the upcoming election on June 8. According to a new modelling by YouGov for the Times, it predicts that the Conservative would get 310 seat in the parliament, down from the prior 330 seat. On the other hand, Labour would get 257 seats, up from prior 229 seat. As the required majority is 326 seats, it now means that a hung parliament is a realistic possibility.

Political uncertainty re-emerged in Europe shortly after the being improved on French presidential election. Now, it is Italy's turn with a snap election later this year becoming increasingly likely. With major parties converging to a deal on a new electoral law, an early election might take place in coming months, probably synchronizing that of German's in September. The euro reacted negatively and declined to the lowest level in more than a week before rebound. The 10-year Italian-German yield spread soared to almost the highest level in a month on concerns that the rapidly-rising Five Star Movement, the populist, euro-skeptic political party, could eventually become part of the coalition in Italy and destablize European Union again.

Dollar trades mixed in early US session after release of a batch of economic data. While Euro stays down for the day, it's already pared back much of the earlier loss. At the time of writing, Canadian dollar is the weakest major currency today as WTI crude oil dips below 50 handle again. That's followed closely by Euro and Dollar. Released in US, S&P Case-Shiller 20 cities house price rose 5.9% yoy in March. US Personal income rose 0.4% in April, spending rose 0.4%. PCE core slowed to 1.5% yoy. From Canada, current account deficit widened to CAD -14.1b in Q1. IPPI rose 0.6% mom in April, RMPI rose 1.6% mom in April.

The Chinese government has accelerated its step to guide the renminbi higher and the immediate effect is a selloff of USDCNY to the lowest level since January, 2017. Last week, the China Foreign Exchange Trade System (CFETS) confirmed that China's central bank has added a counter cyclical adjustment factor (CCAF) to the calculation of the USDCNY daily fixing rate. The government indicated that the adjustment factor would help guide market expectations and let the fix reflect more accurately China's macroeconomic fundamentals. It is appropriate for the move to be introduced in this period of time when the US dollar is weak, as, in our view, the aim of which is to stabilize renminbi, i.e. to prevent it from weakening too much. Given the lack of the details of this adjustment factor, the movement of renminbi is getting more non-transparent, as well as government-driven, rather than market- driven.

Euro tumbles broadly this week as some traders are betting on an early election in Italy, that creates some political uncertainty again. Leaders of major political parties are going to discuss, in the coming weeks, a new electoral law with a proportional system similar to the German model. And it's believed that an agreement is close between the leaders that could pull ahead the elections original scheduled in early 2018. Former Prime Minister and Democratic Party leader Matteo Renzi, who's desperate to seek a come back after the referendum defeat, is pushing for an early election as soon as in September, at the same time as Germany's own election. But ultimately, the move would also require President Sergio Mattarella's decision to dissolve the government. After all, the markets are starting to price in the development.

It's reported that North Korea launched another ballistic missile test today, the 9th this year. It's also the third week in a row that missiles were launched. Japanese Prime Minister Shinzo Abe responded and said that "as we agreed at the recent G7, the issue of North Korea is a top priority for the international community." And, "working with the United States, we will take specific action to deter North Korea." Nonetheless, reactions in the forex markets are muted as traders were getting bored with such news. In addition, holidays in China, Taiwan, UK and US also contributes to the lack of volatility. Meanwhile, the Korean KOSPI closed down -0.1% after failing to hold on to initial gains.

The biggest development last week was the sharp selloff in the British Pound on surging uncertainty over the election in June. FTSE 100 jumped to record high, riding on Sterling weakness. It was believed that the Conservative Party would have a landslide victory back in April when Prime Minster Theresa May called for a snap election. Back then, the Conservative had over 20 points lead over Labour. However, according to the latest YouGov poll showed that the margin narrowed sharply to just 5pts. The news sent GBP/USD to as low as 1.2774 before closing at 1.2794, comparing to 1.3047 high in May. EUR/GBP jumped to as high as 0.8750 before closing at 0.8725, comparing to this month's low at 0.8383. GBP/JPY also dropped sharply to as low as 142.11 before closing at 142.44, comparing to this month's high at 148.09.