Equities and risk-linked currencies gained, while safe havens slid during the Asian session Thursday, following reports that the US and China agreed on a tentative “truce”, just ahead of the much-awaited meeting between their Presidents at the G20 summit. The report increased hopes that the leaders of the world’s two largest economies may decide to pause their trade war and restart negotiations in order to reach common ground and finalize a deal.
The dollar traded lower against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained only against the safe-havens JPY and CHF, while it underperformed versus NOK, NZD, AUD, CAD and SEK in that order. The greenback traded virtually unchanged against EUR and GBP.
The performance in the FX world suggests a risk on trading environment. Indeed, during the EU morning we had the first wave of improvement in investors’ morale, which was triggered by comments from US Treasury Secretary Steven Mnuchin, who was quoted as saying that a US-China deal is 90% done. EU indices rose on the remarks, but the rally faded after his comments were corrected to show that he used past tense, namely, that he said a deal “was” 90% complete. Eventually, most of the major EU and US indices closed slightly in the negative zone, with the exceptions being DAX and Nasdaq, which gained 0.14% and 0.32% respectively.
Having said all that, investors found another reason to cheer during the Asian trading, as a media report said that the US and China agreed on a tentative “truce”, just ahead of the highly anticipated meeting between their leaders at the G20 summit. According to the South China Morning Post, the agreement would help avert tariffs on the remaining Chinese goods imported to the US. Both Japan’s Nikkei 225 and China’s Shanghai Composite ended their sessions in the green following the report, rising 1.19% and 0.69% respectively.
Yesterday, US President Trump said that he wants to make a trade deal with China, but he remains prepared to proceed with additional tariffs if the meeting with his Chinese counterpart in Japan leads nowhere. Thus, the aforementioned media report raised more hopes that the outcome at the G20 may be a sort of agreement. That said, we repeat that we don’t expect a final and signed accord. We believe that the two leaders could agree not to proceed with fresh tariffs and restart negotiations in order to reach common ground and finalize a deal.
As for how investors may react, they could increase their risk exposure in case the meeting ends on a positive note, but we believe the response is unlikely to be massive. After all, expectations over a market-friendly outcome have already started to increase, and barring any negative headlines, they could continue building up as we head into the summit. The rebound we saw in Asian equites could roll over into the EU and US sessions today. In the FX arena, the commodity-linked currencies, like the AUD and NZD, may continue to benefit, while the safe havens CHF and JPY are likely to stay offered. Now, in case talks between Trump and Xi fail, investors could get largely disappointed. They could thereby abandon risk assets and seek shelter into safe havens.
From Thursday last week, when it reached its May high, the DAX 30 index had been on gradual move lower. This led to another test of the lower side of the rising channel that the price is trading in from the end of May. DAX 30 managed to rebound from that line and it seems it is now trying to make its way back up to the highs of this week. Our oscillators are somewhat in support of the upside scenario, hence why we will aim for slightly higher areas, at least in the short run.
A push above the 12320 barrier, marked near yesterday’s high, could invite more buyers to join the game and lead the price to the 12385 hurdle, which marks the intraday swing high of June 20th. The index might stall near that area, or even retrace back down, but as long as it remains above the lower side of the rising channel, we will continue aiming higher. If DAX 30 gets another boost, which would help it overcome the 12385 hurdle, the move might lead the index towards the 12440 level, marked by last week’s high.
Alternatively, if the lower side of the aforementioned rising channel fails to withhold and breaks, this might raise concerns in the bull-bloc. If the index continues drifting south and falls below the area between the 12165 and 12140 levels, this might be seen as bearish sign and DAX 30 could be taken over by the bears. In addition to that, the price could drop below the 200 EMA on the 4-hour chart, which might also add a bit more negativity to the short-term outlook. We will then aim for the 12055 obstacle, a break of which could drive the index slightly below the psychological 12000 zone and test the 11985 level, marked by the low of last week.
After trading for a couple of months below a short-term downside resistance line taken from the high of April 23rd, AUD/CHF has finally broken the downside line and is now slowly drifting higher. Our oscillators show that the upside momentum is picking up again, which may lead the rate a bit higher. For now, we will continue aiming a bit more to the upside, but we will stay careful, in case the market sentiment changes quickly, which could bring the pair back down again.
If AUD/CHF continues to drift in the northern direction, it may test the next good area of resistance at 0.6883, marked by the high of June 19th. We might see the rate stalling near that zone, or even retracing back down a bit. But as long as the pair remains above the aforementioned downside resistance line, we will continue aiming higher. Another strong push from the bulls could help AUD/CHF to bypass the 0.6883 obstacle and aim for the 0.6906 barrier, marked near the highs of June 11th and 12th. Also, this is where the rate might end up testing the 200 EMA on the 4-hour chart, which may provide additional resistance to the pair.
On the downside, a strong reversal, leading to a break back below the previously-discussed downside resistance line, could spook the bulls from the field, especially if AUD/CHF also falls below the 0.6807 zone. That zone is marked near the high of Tuesday and by the intraday swing low of Wednesday. Such a move could increase the pair’s chances of moving further down towards the 0.6776 hurdle, a break of which might lead to the 0.6747 level, which is the lowest point of June.
During the European morning, we get Germany’s preliminary inflation data for June. Expectations have changed since Monday and now suggest that both the CPI and HICP rates have held steady at +1.4% yoy and +1.3% yoy respectively. This would raise speculation that Eurozone’s headline CPI rate, due out tomorrow, may stay unchanged as well.
In the US, the final GDP for Q1 is due to be released, and it is expected to confirm its second estimate of 3.1% qoq SAAR. Even if the rate is revised somewhat higher, we expect this release to pass unnoticed as it will be referring to a period ahead of the latest escalation in trade tensions between the US and China. The Atlanta Fed GDPNow model suggests that the economy slowed to +1.9% qoq SAAR in the second quarter, while the New York Nowcast points to an even more severe slowdown, to +1.4%. At last week’s meeting, the FOMC dropped its “patient” stance, and instead noted that it will “act as appropriate” to sustain the economic expansion. With 7 of its 17 members also favoring two quarter-point rate cuts by year end, market participants have ramped up their expectations with regards to lower US rates, with a 25bps cut fully priced in for the next gathering. US pending home sales for May and initial jobless claims for the week ended on June 21st are also due to be released. Pending home sales are expected to have rebounded 1.1% mom after sliding 1.5% in April, while initial jobless claims are anticipated to have increased to 220k from 216k the week before.
As for tonight, during the Asian morning Friday, we get the usual end-of-month data dump from Japan. The headline Tokyo CPI rate is expected to have risen to +1.3% yoy from 1.1%, but the core one is forecast to have ticked down to +1.0% yoy from +1.1%. The unemployment rate is expected to have held steady at 2.4%, while the preliminary industrial production data for May are anticipated to show a slight acceleration to +0.7% mom from +0.6%. The Summary of Opinions from last week’s BoJ gathering is also due to be released. At that meeting, the Bank kept its ultra-loose policy and forward guidance unchanged. That said, following the decision, Governor Kuroda said that extra stimulus would be considered if momentum towards reaching their inflation aim is lost. Thus, we will scan the report for clues on how strong such a case is, and when further easing may be introduced.
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