Wednesday was another day marked by risk-off trading and the reason was once again fears of escalating US-China tensions and concerns over global economic growth. We also had a BoC rate decision. The Bank kept interest rates unchanged, but the statement may have not been as upbeat as some may have expected, and thus, the Loonie slid. As for today, we have the second estimate of the US GDP for Q1, while during the Asian day Friday, China releases its PMIs for May.
The dollar continued trading higher against most of the other G10 currencies on Wednesday and during the Asian morning Thursday. It underperformed only against SEK, while it traded virtually unchanged versus AUD.
Once again, the performance in the FX sphere does not paint a clear picture with regards to the broader market sentiment. However, the equity world suggests that investors remained on the defensive. Major EU and US stock indices were a sea of red yesterday, with the negative sentiment rolling into the Asian session today. Both Japan’s Nikkei 225 and Shanghai’s Composite fell 0.39% and 0.66% respectively.
It seems that investors continued to abandon the equity market in favor of safe havens, and although the yen was among the losers, the dollar and global government bonds continued to gain. The result was lower yields, with the US 10-year rate sliding another 0.26%, after tumbling 1.81% on Tuesday. Australia’s 10-year yield traded below the RBA’s OCR for the first time since 2015, though it rebounded somewhat thereafter, while the New Zealand 10-year yield hit a record low. In Europe, German Bund yields fell further into the negative territory, hitting a low of -0.179%. The record low is near -0.200% and was hit in 2016.
For another day, the flight to safety was the result of fears over escalating US-China tensions and concerns over global economic growth. Late on Tuesday, China’s Huawei filed lawsuit against the US government, while yesterday, US State Secretary Mick Pompeo said that the US may or may not get a trade deal with China.
Not that investors were hoping much on that front lately, but an official statement carries more weight and gives no reason for market participants to increase their risk exposure. On the contrary, as long as the two nations remain unwilling to work things out, investors are likely to continue trading in a risk-off fashion. As we noted yesterday, we believe the path of least resistance for risk assets may be to the downside, while for safe havens could be north.
Back to the currencies, the Swedish Krona was yesterday’s main gainer, coming under strong buying interest after data showed that Sweden’s economy grew by more than expected in the first three months of 2019. The yoy GDP rate slid to +2.1% from +2.4% in Q4 2018, but this was still well above the Riksbank’s own projection for 2019, which is at +1.7% yoy.
At their latest meeting, policymakers decided to push back the timing of when they expect interest rates to rise further, noting that “The repo rate is expected to be raised again towards the end of the year or at the beginning of next year”. Thus, following the better-than-expected inflation data for April, a GDP rate above the Bank's own forecast keeps the door open for a year-end hike. However, we prefer not to rush into conclusions as the next Riksbank meeting is scheduled for July 2nd, and up until then we will have the May inflation data in hand, which will put us in a better position to examine whether the world’s oldest central back could hike this year, or not.
The DAX 30 index took another hit yesterday, after breaking its medium-term upwards moving trendline taken from the low of December. But the German index, once again, managed to find good support near the 11810 hurdle, marked by the low of May 13th. This area now becomes an important support zone, which if broken could open the door to further declines. This is why we will remain cautiously bearish and wait for a confirmation break below that zone, before we get excited about the downside again.
Given that DAX has rebounded slightly from the above-mentioned 11810 hurdle, there is a chance to see a bit more correction to the upside, where the index could test the 11924 barrier, marked by the low of May 23rd. If the price struggles to get above that barrier, the index may experience another round of selling. This might lead DAX to the 11810 obstacle again, a break of which would confirm a forthcoming lower low and send the price towards the 11725 mark, which is the high of April 1st.
On the other hand, in order to abandon the bearish scenario, at least for a while, we would like to see the price pushing back above the aforementioned upside trendline and the 12010 hurdle, marked by Monday’s low. However, for a better confirmation of the upside, we will wait for a clear break above the 12120 barrier, marked by the high of May 28th. This way, the index would be on its way to form a higher high again, which could lead to a test of the 12215 zone, which is the peak of May 22nd. If that price acceleration continues and the 12215 zone fails to withstand the pressure from the buyers, the next potential target on our radar could be the 12320 level, marked by the high of May 16th.
Yesterday, apart from developments and headlines surrounding the US-China sequel, CAD-traders had to deal with the BoC rate decision as well. The Bank kept interest rates unchanged at +1.75%, while the statement may have not been as upbeat as some may have expected, and thus, the Loonie slid.
Officials noted that recent data have reinforced their view that the slowdown in late 2018 and early 2019 was temporary, but they also highlighted the heightened uncertainty due to the recent escalation of trade conflicts. They also said that recent data were in line with their projections, which may have come as a surprise given the strength of recent indicators, and especially with regards to the labor market. Now, as far as the forward guidance is concerned, they kept it largely unchanged. They noted that the degree of accommodation provided by the current rate remains appropriate and that they will remain data dependent in taking future decisions.
Although we expected the Bank to keep its forward guidance unchanged, we saw chances for a slightly more upbeat tone in the statement. Perhaps market participants’ view was more or less the same and that’s why the Canadian dollar slid at the time of the announcement. Looking ahead, we expect the currency to remain extremely sensitive to data, with the next release in line being Canada’s GDP data for Q1, due out tomorrow. For today, the currency could stay on the back foot, due to a possible continuation of the current risk-off trading.
After a strong reversal to the downside on May 1st, CAD/CHF drifted lower, trading below a short-term tentative downside line drawn from the high of that reversal day. Recently, the pair established a new support zone, at 0.7433, which held the rate twice from falling. Although we saw a good rebound from that zone, still, CAD/CHF is struggling to form a higher high. But before getting comfortable with the downside again, we would like to see a break below the 0.7433 hurdle first, hence why we will stay somewhat bearish for now.
As mentioned above, a rate-drop below the 0.7433 zone would confirm a forthcoming lower low and could send the pair to test the 0.7413 obstacle, which marks the inside swing high of March 28th. Even if CAD/CHF bounces from that obstacle, as long as it remains below the 0.7433 hurdle, we will class that rebound as temporary correction before another leg of selling. If that happens and the rate slides below the 0.7413 area, this may open the door to the next potential support zone, at 0.7396, marked by the low of March 28th.
Alternatively, if CAD/CHF travels above the 0.7465 barrier, marked by yesterday’s high, this could allow the bulls to push the pair higher for a larger correction, as the rate would still be below the aforementioned downside line. We could then examine the possibility of a further move towards the 0.7493 obstacle, a break of which could lead CAD/CHF to test the above-discussed downside line and the 0.7504 level, which might provide some additional resistance.
Today, it is Ascension Day in Switzerland, Sweden and Norway, and therefore, the respective markets will be closed.
In the US, the second estimate of Q1 GDP is due to be released and the forecast suggests a downside revision to +3.1% qoq SAAR from +3.2%. In our view, this data may pass unnoticed as we already have models and indicators suggesting how the economy has been performing during Q2. Investors are also likely to stay more focused on releases concerning May and onwards for clues on how and whether the latest trade tensions have impacted the economy. Initial jobless claims for the week ended on May 24th are also due to be released and expectations are for a slight increase to 216k from 211k the week before.
With regards to the energy market, we get the EIA (Energy Information Administration) weekly report on crude inventories for the week ended on May 24th. The forecast is for a 0.86mn barrels decrease, after the 4.74mn increase reported previously.
As for tonight, during the Asian morning Friday, we get the usual end-of-month data dump from Japan. The unemployment rate for April is forecast to have ticked down to 2.4% from 2.5%, while the jobs-to-applications ratio is expected to have remained unchanged at 1.63. No forecast is available for the headline Tokyo CPI for May, but the core rate is anticipated to have ticked down to +1.2% yoy from +1.3% in April. Retail sales for April are expected to have increased +1.0% yoy, the same pace as in March, while preliminary industrial production data is forecast to show a 0.2% mom rebound after a 0.6% slide the month before.
China’s manufacturing and non-manufacturing PMIs for May are also coming out. The manufacturing index is anticipated to have slid back to contractionary territory, after staying above 50 for two months. Specifically, it is expected to have slid to 49.9 from 50.1. As for the non-manufacturing print, it is expected to have remained unchanged at 54.3. Following last week’s disappointing PMIs from both the Eurozone and the US, another disappointment from China could add to fears that the latest escalation in US-China tensions could jeopardize global growth.
As for the speakers, we have two on today’s agenda: Fed Vice Chair Richard Clarida and BoC Deputy Governor Carolyn Wilkins.
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