EUR/USD soars sharply as markets are heading into US session. While some might point to sluggishness in USD/JPY as argue that risk appetite is not but. But they missed the point that USD/JPY is usually not the best pair that correlates with risk sentiment. Just like today, JPY and USD are the two weakest ones.
Back to EUR/USD, the break of 1.2344 minor resistance now invalidate the case of medium tem reversal in the pair. It’s too early to judge whether rise from 1.2214 is resuming the larger up trend or it’s another leg in the sideway pattern from 1.2555. But in either case, further rise should be seen back to 1.2475 and above in near term.
BoE known hawk Ian McCafferty urged his fellow policymakers not to “dally” when it comes to tightening policy modestly.
He is seeing no labor market slack in the economy. In addition, there are modest upside risks to wage growth forecasts presented in the February Quarterly Inflation Report. He added that “It’s not wages suddenly bursting away, but it gives you a modest upside risk.” Also, McCafferty is concerned on whether import price inflation would fade as the central bank forecasted.
On the other hand, he acknowledged that Brexit uncertainty will be a permanent feature of the economic landscape of the UK. While it may hamper long term investments, the impact on short term projects or exports would be small.
European Central Bank (ECB) Governing Council member Ewald Nowotny spoke in the European Money and Finance Forum (SUERF) today. .
Regarding monetary policy, it reiterated that “it is time for a gradual normalization” as inflation pressure will eventually materialize. But he also emphasized that “this normalization requires a delicate balancing of measures as well as careful sequencing in time.” He noted that ECB is now at an “important turning point”. While the Eurozone has very strong economic expansion, it’s an unequal one.
He stressed that the ECB framework is well equipped to cope with the evolving inflation debate. But still, exit is complex due to the large amount of stimulus in place. Nowotny also repeated all other central bankers have said over time. That is, tightening too soon would stifle recovery. Falling behind the curve would risk creating bubble in assets.
On the topic of trade war, Nowotny warned of the “negative effects for all involved”. And, “the direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains… It might have negative effects on financial stability, but effects on monetary policy are not very clear.”
Bloomberg reported citing a “person familiar with the situation” regarding US-China trade tension. That “person” said China Vice Premier Liu He rejected US request to stop subsidizing business related to its “Made in China 2025” initiative.
Request from the US came after China offered to lower it’s trade surplus to US by USD 50b. And that would be done by China buy more liquefied natural gas, agricultural products, semiconductors and luxury goods from the US. China’s proposal also include opening the financial sector at a faster pace, giving US companies more access to the e-commerce markets.
In addition, that “person” said Liu said that President Xi Jinping is ready to fight back in Trump wants a trade war. And China is open to talks but won’t initiate it.
Our views
It’s yet another Bloomberg report with information from a “person”. Bloomberg didn’t even specify that it’s from a Chinese government official. So, there is no way for us to judge whether is information is indeed from the US or from China. Even so, is it something that leaked, or made up, from Trump’s own team?
For now, we don’t believe that China has offered to cut the surplus to US by USD 50b. There is no urgency for China to offer anything. It takes from now to May 22 for Trump to collect public input on the tariffs on that USD 50b. What will the end-list be? It’s a big unknown, not to mention that list of USD 100b of goods. Even if China would offer something eventually, would Xi want to drag the negotiation beyond the mid-term election in the US?
Dallas Fed President Robert Kaplan reiterated his expectation for two for rate hikes this year. And, 2018 is seen a a relatively solid year for growth to him. But Kaplan also noted that it is going to be watching the yield curve “very carefully”. And he won’t “blindly” support rate hikes if yield curve keeps flattening.
In addition, like other Fed officials, Kaplan said it’s “too early to judge” how the trade spat between the US and China is going to affect the economy. But he warned that if the rhetoric goes on for long enough at this level, it is “having somewhat a chilling effect”.
He added that “I’m still hopeful when we look back a year or two from now you’ll see very little actually done in the way of tariffs that were implemented”. And, “that would be my base case, and I think we are in the early innings of this.”
The financial markets are responding positively to China President Xi Jinping’s calm but uninspiring speech at the Boao Forum for Asia today. At the time of writing, Nikkei is trading up 1%, Hong Kong HSI is up 0.9%. JPY is deeply lower at the current 4 hour bar while commodity currencies show much strength. This is a clear sign of risk appetite.
Zero-sum game thinking is outdated
Xi urged the world not to return to “Cold War” mentality. He said that “human society is facing a major choice to open or close, to go forward or backward.” And, “in today’s world, the trend of peace and cooperation is moving forward and a Cold War mentality and zero-sum game thinking are outdated.”
And, he added that “paying attention only to one’s own community without thinking of others can only lead into a wall.” XI urged that “we can only achieve win-win results by insisting on peaceful development and working together.”
Stay committed to multilateral frameworks
Regarding trade, Xi said that “China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account.” And, “we hope developed countries will stop imposing restrictions on normal and reasonable trade of high-tech products and relax export controls on such trade with China.”
Xi also emphasized the need to “stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks”.
China to further open up
Xi also talked about the plans to further open up the massive Chinese markets to foreign investments. The measures would include “significantly” lowering import tariffs for autos, enforcing intellectual property protection, and improving investment protections for foreign companies.
Our views
Xi’s speech is the kind that we expected. He is not a leader who thrives on populism and thus there wasn’t any emotionally charged over the top words or phrases. Xi is a leader who survives on internal party politics in a politically closed country. The reiteration of commitment to multilateral relationship is consistent with the party line to accuse US of protectionism.
The pledges to open up the markets have been delivered by various Chinese leaders for two decades but actual delivery has been relatively small. And for now, these pledges remain words only. In addition, China still have the option of opening the markets to all but those who don’t commit to multilateral frameworks.
So, does Xi’s speech do something to ease the trade tension with the US? Certainly not. Does it worsen the relationship? No neither. It’s like calling “check” playing poker. The ball is still on Trump’s court.
Below is Xi’s speech with English translation voice over.
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Australia NAB business confidence dropped another 2 pts to 7 in March, down from 9. Business conditions dropped 6 pts from February’s record high at 20 to 14. That’s 3 points lower than January’s 17.
Nonetheless, NAB noted in the release that “conditions remain well above average, with reasonably broad based strength across industries although retail continues to lag.” The historical average is at 5.5 and unchanged in trend terms.
“Business confidence eased again and is now only just above its long-term average, although leading indicators remain at solid levels, as is the employment index.” “The survey was conducted shortly after US President Trump’s announcement of tariffs on at least $50 billion of Chinese imports, which may have affected sentiment.”
Regarding inflation, “final product price inflation remains muted and retail prices declined. However, purchase cost growth has been moving higher since late 2016 providing a tentative sign of inflationary pressure.”
On wages, “labour cost (wage bill) growth moderated after rising the previous month.”
Canadian Dollar surges as BoC’s Business Outlook Survey painted a positive picture. In particular, business sentiments were supported by “healthy” sales prospects. Capacity and labor pressures are “evident” in most regions due to strong demand.
Here are highlights of the survey:
Forward-looking sales indicators remain positive across most regions and sectors. Some firms expect a moderation in sales activity from high levels in the past year or a gradual slowing of the pace of the recovery in the energy sector.
While firms’ expectations for US economic growth have strengthened further, some cited rising protectionism and reduced competitiveness as factors limiting the impact on their sales.
Although less so than in recent surveys, intentions to increase investment continue to be widespread. Employment intentions are solidly positive, based on firms’ plans for hiring to support expected sales growth or to expand operations.
Indicators of capacity pressures and labour shortages edged down but are still close to recent high levels. Remaining economic slack appears to be mostly concentrated in the energy-producing regions.
Despite expectations for faster input price growth overall, on balance, firms continue to anticipate only modest acceleration in the growth of their output prices due to competitive pressures. Partly driven by rising labour costs, inflation expectations picked up but are still well within the Bank’s inflation-control range of 1 to 3 per cent.
While credit conditions were unchanged for most firms, the indicator points to a slight tightening.
The Business Outlook Survey indicator continues to be high, signalling positive business sentiment.
CAD is now the second strongest for the day while JPY remains the weakest one.
H action bias in CADJPY turned positive again.
CADJPY’s retreat was contained above 83.36 support, maintaining near term bullishness. The rebound from 80.52 is likely ready to resume for 38.2% retracement of 91.56 to 80.52 at 84.73.
ECB President Mario Draghi sounded cautious as usual in today’s comments. Here are some highlights:
“While we remain confident that inflation will converge towards our aim over the medium term, there are still uncertainties about the degree of slack in the economy,”
“A patient, persistent and prudent monetary policy therefore remains necessary to ensure that inflation will return to our objective,”
Regarding recent stock market volatility, Draghi sounded calm though as he noted:
“These risks materialized in global equity markets in early 2018, although to date without significant spillovers to euro area credit markets and hence broader financial conditions.”
ECB Vice President Vitor Constancio also spoke today:
“Inflation, which is our objective, has not yet responded completely to what we wish to see.”
“We have confidence that inflation will continue to evolve…(but) we should be cautious in order to avoid that some early, strongly restrictive policy could derail this development,” he added.
Bloomberg reported that Chinese officials are studying the impact of yuan depreciation on two fronts. Firstly, analysis was taken to look at using currency depreciation as a weapon in the trade war with the US. Secondly, it’s also studied how yuan depreciation could help offset any trade deal with US that curb exports.
However, one important point to note is that the source for the information is obviously unnamed. And further than that, Bloomberg just said it’s from “people familiar with the matter”. So it looks unlikely that the information is from any Chinese officials.
At the same time, it’s firstly seen by many that yuan devaluation could destabilize the China’s own markets, and that could do more harm to itself than to the US. And more important, China has been trying to portrait itself as rule follower that complies with the WTO book. It keeps blaming the US for unilateralism and protectionism and tries to to use that to draw international support. Devaluation of the Yuan will put China up against other countries too.
President Xi Jinping probably won’t mind US President Donald Trump reiterating the label that China is a currency manipulator. But he most certainly doesn’t prefer other countries to jump on that bandwagon.
So, while the news is currently in Bloomberg’s headline, its accuracy is suspectable.
Eurozone Sentix investor confidence dropped notably to 19.6 in April, down from 24.0 and missed expectation of 19.6. Current situation index dropped from 24.0 to 19.6, continuing the decline fro January’s high of 32.9. Expectation index turned negative to -1.5, down from March’s 4.3. That’s also a continuation of the fall from 18.8 back in January.
Highlights from the release:
All regions of the world are on an economic downturn in April. Despite the still good assessment of the situation, there is no doubt that the global economy is cooling off.
Expectations for the Euro area are negative again for the first time since July 2016. The downward dynamic for Germany is even more pronounced.
The euphoria for the US economy is also fading noticeably. Expectations drop to a value of -7 percentage points. Trump’s statements and measures on punitive tariffs raise serious concerns. The component for Expectations of the sentix Global Aggregate falls to its lowest value since February 2016.
Regarding Eurozone, the report noted that clear visible cooling. And, “after the declines in expectations had already indicated a turnaround in the previous months, a significant economic slowdown must now be assumed.” And, “the customs disputes, fueled by US President Donald Trump, are leaving their traces.”
Regarding the US, Sentix noted that “observers rely on the common sense of the US government and assume that the demands are merely negotiation tactics.” But it warned that “Trump is consistently working through its ‘America first’ agenda”. And, The positive effects of the tax reform have quickly evaporated, and expectations for the US economy are plummeting.
The forex markets is rather steady today so far. As seen in the D heatmap, most pairs are staying inside Friday’s range. AUD is trading as the strongest one while JPY is the weakest. This is a reflection of risk appetite in the Asian markets, with Nikkei and HSI trading up as the week starts. USD is mixed for now, up against EUR, JPY and CHF, but down against GBP, CAD, AUD and NZD.
Movements in USD has been somewhat noncommittal recently, EUR/USD broke 1.2238 support last week but quickly recovered after hitting 1.2214. USD/CHF breached 0.9626 key fibonacci resistance but couldn’t found any follow through buying. Momentum in USD/JPY was also weak even though it extended recent rebound to 107.48. AUD/USD is staying in range above 0.7642 support. The clearer movements were seen in GBP/USD’s rebound after hitting 1.3982 support, but that mainly due to GBP’s strength. USD/CAD’s break of 1.2814 also suggests bearish reversal.
Nonetheless, we might be seen some decisive moves in USD soon. The index is now approaching medium term trend line resistance, and a breakout is likely imminent. For now, there is no sign of a trend reversal yet. And the fall from 103.82 (2017 high) is more likely to extend than not. Break of 88.25 will pave the way to 61.8% retracement of 72.69 to 130.82 at 84.58. We maintain the view that fall from 103.82 is a corrective move. And strong support is expected from 84.58/75 to contain downside and bring sustainable rebound finally.
Asian markets are trading generally firmer today despite the selloff in the US on Friday. At the time of writing. Nikkei is trading up 0.65%. China’s SSE is back from holiday and is up 0.35%. Hong Kong HSI is up more than 1.8%.
However, we’d like to point out that risks for deeper global market selloff remains. As we pointed out in the weekly report too, DOW’s triangle pattern is in shape after Friday’s selloff.
DOW’s rejection from 55 day EMA, below the near term trend line, and Friday’s selloff set up the pattern from 23360.29 to be a triangle consolidation pattern. Immediate focus will be back on 23360.29 this week. Overall, price actions from 26616.71 record high are seen as correcting the up trend from 2016 low at 15450.56. We’d expect deeper decline before the correction completes. And break of 23360.29 will target 38.2% retracement of 15450.56 to 26616.71 at 22351.24.
Tarek Al-Wazir, economy minister for the German state of Hesse, where Frankfurt is situated, said that 18 banks have committed to Frankfurt since the Brexit vote. He said to the Press Association in London that “there will be other entities who are in the decision process now”. And he emphasized that ” if you compare everything that happened since the Brexit referendum and if you compare the real decisions made, I think we are number one on the continent and I’m sure this will continue.”
Though, Al-Wazir expressed that he’s “a little bit disappointed” as Paris was chosen as the new location of the London-based European Banking Authority. While Paris has its own competitive edges, Al-Wazir believed that “the ECB is far more relevant”.
Hubertus Vath, managing director of city lobby group Frankfurt Main Finance noted that there are “100 institutions” which have to make decisions on locations post Brexit. And, just around 40 have announced that decisions already. There are still 60 “up for grabs” for EU cities.
Talking about the Boao Forum, there is one interesting point to note. On Sunday, head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences Zhang Yuyan said there is no intention of allowing trade dispute with the US to spill over to finance. Zhang emphasized that there should be a “firewall between trade problems and financial ones”. And, the chance of China selling its massive US Treasury holdings due to a trade war is “very small”.
Zhang added that “maybe one or two days before the actual implementation (of the tariffs), the US side will gain its reason and sense.” And, “there are many cases of compromises being reached at the last minute.”
Chinese President Xi Jinping’s speech at the Boao Forum for Asia on Tuesday will be a key focus this week. Xi has so far been quiet regarding the trade tensions with US President Donald Trump. There are expectations for Xi to make use of the occasion to push back and defend. Or, Xi could say something consistent with China’s theme of blaming US for unilaterialism and protectionism,
However, Xi’s leadership and communication style is clearly very different from Trump’s. And it’s, to us, unlikely for Xi to suddenly change his style to adopt a confrontational way like Trump. That is, the way that Trump tripled down on the tariff proposals to USD 150b immediately after Chinese response. Nor would Xi adopt a way like Trump, who could say “President Xi and I will always be friends” right after raising the threat to China. We’ve never heard Xi saying that Trump is his friend (haven you?). It’s more likely for Xi to just reiterate the push for globalization, compliance with then WTO and its own commitment in opening up the markets. Xi, as self-envisaged emperor, will just let his officials do the barking.
Reuters reported that Trump’s push for some form of NAFTA “agreement” before the Summit of the Americas in Lima could fail. It’s widely rumored that Trump would at least want to have something “symbolic” to sign this week. But there are still many fundamental differences between the US with its NAFTA partners Canada and Mexico.
A source was quoted saying that even a symbolic agreement needs to contain “everything defined in black and white” and key issues could not be left open for negotiation afterwards. The source noted that a deal could be possible by the end of April or early May if discussions keep advancing.
It should be noted that CAD has been strongest one this month as seen in the monthly top movers table, as well as the M heatmap. It’s mainly due to optimism that a certain form of NAFTA agreement could be delivered at the Summit of the Americas on April 13-14, or before. There is firstly, risk of sell-on-news, if the agreement is delivered. There is now secondly, risk of selloff on disappointment that it’s not delivered. So, CAD traders, beware.
It’s reported that North Korea is ready to discuss denuclearization with the US, and thus, increasing the chance of meeting between it’s leader Kim Jong-un and US president Donald Trump in May. Financial Times quoted and unnamed National Security Council spokesperson saying that “I confirm that the United States and North Korea have been holding talks in preparation for a summit, and that North Korea has confirmed its willingness to talk about denuclearization.” Reuters also quoted an unnamed official saying “the U.S. has confirmed that Kim Jong Un is willing to discuss the denuclearization of the Korean Peninsula.”
Separately, China’s Ministry of Commerce announced it’s banned exports to North Korea with potential dual use in weapons of mass destruction. Details on 32 materials banned were released by the MOFCOM, including technologies and forms of equipment, including particle accelerators and centrifuges.
EURUSD powers through 1.2344 resistance heading into US session
EUR/USD soars sharply as markets are heading into US session. While some might point to sluggishness in USD/JPY as argue that risk appetite is not but. But they missed the point that USD/JPY is usually not the best pair that correlates with risk sentiment. Just like today, JPY and USD are the two weakest ones.
Back to EUR/USD, the break of 1.2344 minor resistance now invalidate the case of medium tem reversal in the pair. It’s too early to judge whether rise from 1.2214 is resuming the larger up trend or it’s another leg in the sideway pattern from 1.2555. But in either case, further rise should be seen back to 1.2475 and above in near term.