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by Charalambos Pissouros

Investor Morale Hurt by US-China Tensions

Equities corrected lower yesterday and during the Asian morning today, while the safe-haven yen gained, perhaps due to fresh tensions between the US and China. Hong Kong’s Hang Seng was the main loser among major indices as China’s National People’s Congress confirmed that it plans to pass a bill establishing “an enforcement mechanism for ensuring national security” for Hong Kong in response to last year’s violent pro-democracy protests.

Equities Slide, Yen Gains on New US-China Frictions

The dollar traded higher against all but two of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most versus NOK, CHF and CAD in that order, while it lost some ground only against JPY and GBP.

USD performance G10 currencies

The strengthening of the dollar and the yen suggests that risk appetite softened yesterday, but the fact that the Swiss franc was among the main losers points otherwise. So, in order to get a better picture with regards to the broader market sentiment, we will turn our gaze to the equity world. There, most major EU and US indices traded lower, with the negative morale rolling into the Asian session today. Both Japan’s Nikkei and China’s Shanghai Composite slid 0.80% and 1.60% respectively, while Hong Kong’s Hang Seng was the biggest loser, tumbling 5.02% as China’s National People’s Congress confirmed that it plans to pass a bill establishing “an enforcement mechanism for ensuring national security” for Hong Kong in response to last year’s violent pro-democracy protests.

Major global stock indices performance

Ahead of that, US President Donald Trump warned that the US would react strongly if China proceeds with national security laws for Hong Kong, after accusing the world’s second largest economy over disinformation in order to hurt his reelection chances, and after US Senators decided unanimously to pass a bill which makes it hard for Chinese firms to stay listed in the US. The new frictions between the US and China may have revived fears that the two nations are unlikely to secure a final trade deal soon and could even jeopardize the already-agreed “Phase One” accord. That, combined with the infected cases from the coronavirus hitting a fresh daily record, may have been the main reasons behind the change from risk-on trading to risk-off.

Daily change in virus cases and deaths

That said, that still does not change our overall view, at least at the moment. We still believe that the prospect of more fiscal and monetary stimulus around the globe, and the fact that headlines suggest that we are closer to a virus drug, may allow risk assets to rebound again. What’s more, even if infections have accelerated strongly, the overall virus curve appears much flatter than a couple of months ago. Thus, even if equities extend yesterday’s slide for a while more, we will still see decent chances for a reversal higher. Having said all that though, we will remain careful as additional tensions between the world’s two largest economies and/or further acceleration in virus cases may keep a lid to equities and risk linked assets, and perhaps bring us back to square one.

We also had a BoJ emergency meeting overnight. Despite Japan’s National core CPI rate tumbling to -0.2% yoy from +0.4%, the Bank kept its policy unchanged, but announced the start of a new small business lending program. In any case, this passed unnoticed by the financial community.

Nikkei 225 – Technical Outlook

Nikkei 225 is still balancing above its short-term upside support line taken from the low of April 3rd. But after hitting the 20815 barrier this week, the index started moving lower and it is now getting closer to the above-mentioned upside line. The price may go ahead and test that trendline, but we will stay somewhat positive, if that line remains intact.

As mentioned above, we are not excluding a possibility to see a touch of the aforementioned upside line, which if stays unbroken, could attract the buyers again, who might take advantage of the lower price. Nikkei 225 may then travel back to the 20815 zone, marked by the current highest point of this week. If that area fails to provide decent resistance and the index climbs above it, such a move would confirm a forthcoming higher high and the next potential resistance level might be seen at 21451, which is the high of March 4th.

Alternatively, if the previously-discussed upside line breaks and the price falls below the 19613 hurdle, which is the low of May 14th, that might be a sign of worry for the bulls, who could get temporarily spooked from the field. Nikkei 225 could then drift to the 19070 obstacle, or even the 18849 area, marked by the lows of May 4th and April 22nd respectively. The index could stall there for a while, but if the sellers continue to dominate the playground, a break of the 18849 area may open the door for a further decline, potentially bringing the price to the 18140 level, marked by the inside swing high of April 2nd.

Japan's Nikkei 225 cash index 4-hour chart technical analysis

AUD/JPY – Technical Outlook

It seems that, from around the beginning of April, AUD/JPY is forming a potential rising wedge pattern. According to the TA rules, such formations tend to break to the downside. However, as long as the lower side of that pattern stays intact, the pair still has a chance of climbing back up. This is why we will remain somewhat positive overall.

If the rate slides below the 70.17 hurdle, which marks the highs of May 11th and 12th, this could increase the pair’s chances of moving further south, where it may end up testing the 69.53 area, or the lower side of the aforementioned wedge pattern. If the bears struggle to push AUD/JPY below the lower bound of the pattern, the rate may rebound and move back up again, possibly even overcoming the above-discussed 70.17 zone. If so, the next potential target might be the highest point of this week, at 71.08, a break of which could push the pair a bit higher to test the upper side of the rising wedge.

On the other hand, if the lower side of the above-mentioned pattern breaks and the rate slides below the 68.55 area, marked by the low of May 14th, that may clear the path for further declines. AUD/JPY could then drift to the 67.62 and 67.29 levels, which mark the lows of May 6th and April 21st. The pair might get held there for a bit, or even rebound slightly higher. That said, if the bulls are not able to push the rate at least back above the 69.53 territory, which is the inside swing high of May 15th, this could trigger another round of selling. AUD/JPY may move south again and if this time the 67.29 obstacle breaks, the next possible support level might be seen near the 66.47 zone, marked by the low of April 8th.

AUD/JPY 4-hour chart technical analysis

As for Today’s Events

During the early European morning, we already got the UK retail sales of April. The headline rate fell to -18.1% mom from -5.1%, instead of sliding to -16.0% as the forecast suggested, while the core rate fell to -15.2% mom from -3.8%. The forecast for the core rate was at -15.0%. Anyhow, the pound barely reacted to the release as this barely changes anything around BoE policy expectations. Remember that the Bank appears ready to expand its QE as early as in June, with several officials noting that negative interest rates are also on the table.

Later in the day, we get the minutes from the latest ECB meeting, as well as Canada’s retail sales for March. We expect the ECB minutes to confirm that policymakers remain willing to adjust all their instruments as necessary, while Canada’s headline sales are forecast to have fallen 10.0% mom after rising 0.3% in February. The core rate is anticipated to have rebounded to -5.0% mom from -15.6%.

We also have one speaker on today’s agenda, and this is ECB Executive Board member Philip Lane.


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