Markets opened in a risk-on fashion yesterday after US President Trump and his Chinese counterpart Xi Jinping agreed to restart talks in order to resolve their trade differences. Among the G10 currencies, the dollar gained the most, as increasing chances for an accord between the world’s two largest economies could imply less need for aggressive easing by the Fed. In Australia, the RBA cut rates again, and kept the door open to more in our view. With regards to the energy market, OPEC members decided to extend their current production cuts by 9 months.
The dollar traded higher against all the other G10 currencies on Monday and during the Asian morning Tuesday. It gained the most against NOK, EUR and SEK in that order, while it gained the least against JPY.
Although the yen was the second strongest in line G10 currency, it was among the two main losers at Monday’s open, just behind the other safe haven, the Swiss franc. Markets opened in a risk-on fashion yesterday after the US President Trump and his Chinese counterpart Xi Jinping agreed to restart talks in order to resolve their trade differences. US President Trump promised to put fresh tariffs on hold and ease restrictions on China’s tech giant Huawei, while China agreed to make new purchases of US farm products.
Global equity indices opened with positive gaps, sustained their gains and closed their Monday sessions in the green. It is worth mentioning that the S&P 500 hit a new record high. That said, sentiment softened somewhat during the Asian session Tuesday, with Japan’s Nikkei 225 and China’s Shanghai Composite ending their sessions virtually unchanged.
It seems that investors preferred to end the party early as, despite the positive outcome of the Trump-Xi meeting, the differences between the two nations have yet to narrow down. It still remains to be seen whether returning to the negotiating table will bear any fruit, or whether everything could fall apart again. Remember that the latest round of tensions was sparked in the midst of talks between the two nations in early May, at a stage where most of a potential deal was agreed, at least according to comments we got back then. Another factor that may have weighed on investors’ morale overnight may be the US government’s threat for imposing tariffs on USD 4bn of additional EU goods due to their dispute over aircraft subsidies. This hurt the euro as well.
Back to the US dollar, on Friday we noted that willingness between Trump and Xi to work things out may prove positive for the greenback, as increasing chances of a truce could also imply less need for aggressive easing by the Fed. Indeed, the greenback was the main gainer with investors taking some Fed-cut bets off the table. Although a quarter-point decrease is still fully priced in for July, and another one is nearly factored in for September, a third one is now expected at the beginning of next year, instead of December as was the case a few days ago.
Nikkei 225 continues to trade above its short-term tentative upside support line taken from the low of June 4th. On Monday, we saw the index breaking and closing above a key resistance zone, at 21619, which previously was the highest point of June. With this move, Nikkei finished off the month with a new high. The price travelled higher, but found good resistance near the 21825 hurdle, from which it retraced back down and tested the above-mentioned 21619 zone, which this time played the role of a strong support. It seems that Nikkei 225 has flattened somewhat, which is also seen on our oscillators, the RSI and the MACD. Both of them are showing a slowdown in the upside momentum, hence why we will take a neutral stance for now and wait for a clear break through one of the above-discussed areas, before considering the next directional move.
A push above the yesterday’s high, at 21825, would confirm a forthcoming higher high on the 4-hour chart and Nikkei 225 could make its way a bit higher. The price might find resistance near the 21915 zone, marked by the low of May 6th. If that zone is still a no-match for the buyers, a break of it could lift the index to the next possible resistance area at 22055, which previously held the price from sliding on April 18th and 26th.
On the downside, a price-drop below the 21619 zone could lead the index to a correction, given that the index is still trading above the aforementioned upside line. We could then see Nikkei 225 moving to the 21540 obstacle, marked by yesterday’s low. The price might stall around there or rebound back up a bit. But if the index struggles get back above the 21619 barrier, this might attract the sellers again and we could see it moving lower again, potentially bypassing the 21540 hurdle and drifting further south.
As it was largely expected, the RBA cut rates by 25bps to a new record low of +1.00% overnight, with officials noting that the cut will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. Officials reiterated that they will continue to monitor developments in the labor market closely and adjust policy accordingly, which in our view means that further cuts are not ruled out, although there were no strong signals with regards to that.
The Aussie slid around 20 pips at the time of the announcement but was quick to recover the losses within the following minute. In our view, this was due to the fact that a cut was largely anticipated. Remember that yesterday, we noted that a cut by itself is unlikely to prove a major market mover and that we will look for clues as to whether the Bank could cut again, and if so, when. As we already said, the statement keeps the door open for further cuts in our view, but we prefer to wait for the minutes of the meeting, as they could shed more light on policymakers’ thinking, as well as upcoming Australian data, before we start examining whether and when another cut could materialize. Governor Lowe’s speech today could also provide extra hints over the Bank’s future plans. According to the ASX 30-day interbank cash rate futures implied yield curve, another quarter point cut is almost fully priced in for December.
Passing the ball to the energy market, yesterday, OPEC members decided to extend their current production cuts by 9 months. Following headlines that Russia and Saudi Arabia have already agreed to an extension of 6 to 9 months, this was largely anticipated and that’s why oil prices did not benefit from the official announcement. On the contrary, both Brent and WTI traded lower yesterday, perhaps due to the disappointing manufacturing PMIs worldwide, which could be a sign of weakening demand. It seems that, in a still oversupplied market and in the face of weaker demand, investors are finding it hard to believe that just a 9-month extension would be enough to support prices.
From around the beginning of May, GBP/AUD has been on a gradual move lower, trading below a short-term tentative downside resistance line taken from the high of May 6th. Last week, the pair found good support near the 1.8040 zone, from which it moved back up again. But yesterday, the rate got held at the 1.8174 barrier, which sent GBP/AUD to the downside again. We can see that the pair is currently in an indecisive mode, which means that we will take a cautious approach for now and wait for a clear break of one of our key levels, before examining a further directional move.
If GBP/AUD slides once again and this time breaks below the 1.8040 hurdle, this would confirm a forthcoming lower low and we could see the pair aiming for slightly lower areas. The next possible target could be around the 1.7990 obstacle, marked by the lows of February 14th and 15th, a break of which could invite even more sellers into the game. This is when we will put the 1.7870 level on our radar, which may once again, act as a magnet for the pair, given that on February 5th the rate was held there and rebounded strongly to the upside.
Alternatively, if GBP/AUD makes a run higher and breaks above the 1.8174 barrier, marked by yesterday’s high, we will see such a move only as the trigger for a slightly larger correction, given that the pair is still below the aforementioned tentative downside line. This could lead the rate to the 1.8245 hurdle, which temporarily held GBP/AUD from moving lower on June 19th. So, this time it may take the role of a potential resistance. But if that area is not able to stop the correction, a further move higher, above the 1.8245 obstacle, could lift the rate to test the downside line, which may provide some resistance for the pair.
During the European day, we get Eurozone’s PPI form May and the UK construction PMI for June. Eurozone’s PPI is expected to have slowed notably in May, to +1.6% yoy from +2.6%, but we don’t expect something like that to prove a market mover. After all, we already got preliminary data on consumer prices for June, which showed accelerating underlying inflationary pressures. The UK construction PMI is anticipated to have risen to 49.3 from 48.6 but bearing in mind the unexpected slide in the manufacturing index yesterday, we see the risks surrounding the construction forecast as tilted to the downside.
As for tonight, during the Asian morning Wednesday, we get Australia’s building approvals for May China’s Caixin services PMI for June. Australia’s building approvals are expected to have stagnated after falling 4.7% in April, while China’s Caixin services PMI is anticipated to have ticked down to 52.6 from 52.7.
With regards to the energy market, the API (American Petroleum Institute) weekly report on crude oil inventories is coming out, but as it is always the case, no forecast is available.
Apart from RBA Governor Philip Lowe, we have three more speakers on today’s agenda: BoE Governor Mark Carney, New York Fed President John Williams, and Cleveland Fed President Loretta Mester.
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