Risk appetite remained supported on Monday following a Friday tweet by US President Trump that the US and Mexico have reached consensus and that tariffs against Mexico have been suspended. In the currency world, the pound was among the losers, coming under selling interest after a string of disappointing UK economic indicators, including the monthly GDP for April, which dropped the most since March 2016.
The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It was higher against NZD, GBP, AUD and NOK, while it slightly underperformed against EUR, CAD, and CHF. The greenback was found virtually unchanged against JPY and SEK.
Although not evident by the performance in the FX sphere, risk appetite continued to be supported, with major global equity indices closing their sessions in the green. Following last week’s hints by several policymakers that they may be willing to reduce interest rates in order to avert a steep economic downturn, investors returned to their desks on Monday having another reason to cheer about. A few hours after the markets closed on Friday, US President Trump tweeted that the US and Mexico have reached a signed agreement over immigration and that tariffs against Mexico have been indefinitely suspended. The Mexican peso surged on the news.
This is the kind of concrete signs we were looking for in order to get confident with a sustained recovery in investors’ morale. However, we still need to see similar “truce” signals in the US-China saga. US President Trump said on Thursday that he will decide whether to proceed with tariffs on the remaining imports from China after a meeting with China’s President Xi Jinping at the G20 summit. Yesterday, Trump added that if Xi does not attend the summit, tariffs will go into effect immediately. In our view, risk sentiment could stay supported for a while more due to the elevated bets over lower US interest rates, as well as the US-Mexico agreement. We expect equities to continue trading north as investors divert flows from safe havens to riskier assets. That said, we will stay on guard as headlines pointing towards more tensions between the US and China may be enough to turn things around.
After breaking its short-term downside resistance line, drawn from the high of May 3rd, Nikkei 225 index moved higher and is now flirting with its 200 EMA on the 4-hour chart. The price continues to climb, trading above a short-term tentative steep upside line taken from the low of June 4th. If the index remains above that upside line, we will target slightly higher areas, at least in the short run. For now, we will take a cautiously-bullish approach, as any negative headline regarding the ongoing US-China dispute might have a bad effect on the equities.
A strong push higher, above the 21290 barrier, marked by the high of May 28th, could invite more buyers into the game and send the index further up. This is when we will consider a possible move to the 21405 zone, or even to the 21530 hurdle, which could provide some resistance, as it did on May 10th. Nikkei may decide to correct slightly lower from those areas, but as long as it remains above the aforementioned short-term steep upside line, we will continue aiming for higher levels. Another price-acceleration could push the index beyond the 21530 obstacle and lead the way to the 21672 area, marked by the high of May 8th.
On the other hand, a break of the that upside line and a price-drop below the 21065 area, marked by the low of yesterday, could scare the bulls and open the door for the bears to step in. We will then target the 20865 hurdle, a break of which may send Nikkei 225 further down, to test the 20640 level, which marks the low of June 5th.
The pound was among yesterday’s losers, coming under selling interest after UK economic releases, including the monthly GDP for April, disappointed. The data showed that the economy contracted 0.4% mom in April, which marks the biggest monthly slide since March 2016, while industrial and manufacturing productions saw their largest tumbles since September 2012 and June 2002 respectively. The nation’s trade deficit narrowed in April, but looking at the details, the report is far from encouraging as it points to steep declines in both exports and imports.
Yesterday, we noted that these numbers for April may not prove major market movers, as we already got data suggesting how the economy may have performed in May. That said, there were major deviations from the forecasts, which suggests that Brexit uncertainty is weighing more than expected on the UK economy. Following the data, the National Institute of Economic and Social Research (NIESR) projected a 0.2% contraction for the whole second quarter, and if upcoming releases continue to disappoint, we believe that this percentage could be revised even lower.
Today, we get the nation's employment report for April. The unemployment rate is expected to have remained at its 45-year low of 3.8%, while average earnings including bonuses are expected to have slowed to +3.0% yoy from +3.2%. The excluding bonuses rate is anticipated to have declined as well, to +3.1% yoy from + 3.3%. According to the IHS Markit/KPMG & REC Report on Jobs for the month, the rate of starting salary inflation was the softest seen in two years, but temp wages rose at the strongest rate since January. Thus, it’s hard to say to which direction the risks surrounding the earnings forecasts are tilted. In any case, even if wages slow somewhat as the forecasts suggest, the general labor market conditions appear to be holding steady. Thus, barring any major deviations from the forecasts, we don’t expect this set to have a major market impact.
We believe that GBP-traders are likely to start turning attention back to the political landscape. On Friday, Theresa May officially stepped down as a leader of the Conservative Party, triggering a contest for her replacement. She will keep her position as Prime Minister until her successor is found, and thus market participants will keep their gaze locked on developments pointing to who that person might be. Up until now, the favorite is Boris Johnson, a hardline Brexiteer who wants Britain out of the UK by the end of October, with or without a deal.
With several others of May’s potential replacements also willing to leave the EU without a deal if needed, the probability of a no-deal Brexit in the end of October remains decent in our view, and yesterday’s data may have been just a taste of how things could turn out for the UK economy in such a scenario. Following a brief pause in the pound’s prevailing downtrend – and even a corrective rebound against some of its counterparts, like the dollar – , we believe that yesterday’s data may have waken the bears up and that the journey south may have resumed.
The British pound felt the heat against most of its major counterparts yesterday and the Swiss franc is one of them. GBP/CHF had been drifting lower for quite a while now, but recently it has slowed down the rate-depreciation. But this could be a temporary pause before another potential move lower, hence why we will remain somewhat bearish for now.
As we can see, yesterday, the pair found good support near the 1.2540 hurdle, which is currently not allowing the rate to fall off the cliff. If, eventually, the bears manage to push GBP/CHF below that hurdle, we may see a move towards the 1.2480 obstacle, which is the low of January 11th. The rate could stall around there, or even rebound back up a bit for a small correction. But if the pair stays below the previously-mentioned 1.2540 zone, this might interest the bears again and we could see another leg of selling. If this time the 1.2480 area fails to withstand the bear pressure, a break of it may lead GBP/CHF to the 1.2418 level, marked by the low of January 10th.
Alternatively, in order to shift our short-term view to the upside, we would like to see a clear break above the 1.2656 barrier, marked by the high of June 6th. This way, more bulls could get back into the game, where they could lift the rate to its next possible resistance area, at 1.2750, which is near the high of May 30th. If the bulls continue to feel confident, the pair might not stop there and the further rate-acceleration could bring GBP/CHF to the 1.2795 hurdle, marked near the highs of May 27th and 28th.
During the European morning, we already got Norway’s CPI data for May, with both the headline and core rates sliding instead of staying unchanged as the forecast suggested. The headline rate slid to +2.5% yoy from +2.9%, while the core one declined to +2.3% yoy from +2.6%.
In the US, the PPIs for May are due to be released, just a day ahead of the CPIs for the same month. Both the headline and core rates are expected to have declined to +2.0% yoy and +2.3% yoy, from +2.2% and +2.4% respectively. This could raise speculation that the CPIs, due out on Wednesday may follow suit. The NFIB Small Business Optimism index for the month is also coming out and the forecast suggests a decline to 102.3 from 103.5.
As for tonight, during the Asian morning Wednesday, China’s CPI and PPI for May are due to be released. The CPI is anticipated to have accelerated to +2.7% yoy from +2.5%, but the PPI rate is forecast to have declined to +0.6% from +0.9%. The API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.
With regards to the speakers, today we will get to hear from BoE MPC members Michael Saunders, Silvana Tenreyro, and Ben Broadbent, while tomorrow, Asian time, RBA Assistant Governor Christopher Kent will step up to the rostrum.
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