EU and US indices closed negative yesterday, with the driver being once again concerns that the US-China trade spat may escalate further. That said, sentiment improved somewhat during the Asian trading today, perhaps as the US eased temporarily the restrictions imposed on Huawei. With regards to the currencies, the Aussie was the main loser, tumbling after the minutes of the latest RBA meeting, as well as RBA Governor Philip Lowe, prompted market participants to increase bets with regards to a June rate cut.
The dollar traded higher or unchanged against the other G10 currencies yesterday and during the Asian morning Tuesday. It gained the most versus AUD, NZD and SEK, while traded virtually unchanged against CAD and JPY. The currencies against which the greenback lost some ground were CHF and EUR.
The weakening of the risk-linked currencies Aussie and Kiwi and the strengthening of the safe-haven franc suggest a risk-off trading environment. Indeed, major EU and US indices were a sea of red yesterday. However, Asian indices came off their lows, with most of them closing in positive territory. Japan’s Nikkei 225 was 0.19% down, but China’s Shanghai Composite gained 1.23%.
Once again, the driver behind the subdued investor morale during the EU and US sessions yesterday may have been concerns that the US-China trade spat is likely to escalate further. Following the US government’s decision to blacklist Huawei, Google suspended some businesses with the Chinese technology firm, while China has accused the US of having “extravagant expectations” over a trade accord that will end their conflict. Sentiment improved somewhat during the Asian trading today, perhaps as the US eased temporarily the restrictions imposed on Huawei. Washington said that it will allow the firm to continue buying US goods until August 19th, in order to maintain existing networks and provide updates to existing handsets.
As for our view, it remains the same as last week. We are still reluctant to trust any recovery in market sentiment. With no concrete signs that talks could resume soon, hopes over an early “truce” remain slim we believe. China said that it has no information over a Trump-Xi meeting at the G20 summit, also adding that they will “wait and see” with regards to whether it will retaliate on Huawei. Although the US appears willing to hold trade talks with EU and Japan, and also agreed with Canada to lift aluminum and steel tariffs, market participants appear to be keeping their gaze locked on the US-China chapter, as the dispute between the world’s two largest economies could well have negative effects on a global scale.
Back to the currencies, the Canadian dollar was the only commodity linked currency that didn’t underperform against its neighboring greenback. This could be due to oil prices staying supported. Yesterday, both Brent and WTI opened with positive gaps after OPEC signaled that it is considering to extend production cuts, while rising tensions between the US and Iran kept the black liquids under buying interest. Following a rocket attack in Iraq, which the US suspects to have been from Iran, President Trump threatened Iran with “great force”, while the nation replied that it would resist US pressure.
USD/JPY managed to travel back to the upside again, after finding good support near the 109.00 zone on May 13th. That said, the pair still remains vulnerable, as it continues to trade below the short-term tentative downside resistance line taken from the high of April 24th. If that downside line continues to hold the rate from pushing higher, USD/JPY could slide back down and test some of its recent key support levels.
If USD/JPY struggles to overcome the downside line, the rate might drop to the 109.80 zone again, which is yesterday’s low. We may see USD/JPY rebounding slightly, but as long as it remains below the above-mentioned downside line, we will stay somewhat bearish. A break below the 109.80 area could send the pair towards the 109.50 obstacle, marked by Friday’s low.
Alternatively, a push above the 110.32 barrier and a break of the tentative downside line could confirm a forthcoming higher high and more buyers may jump on the bandwagon. This could lead USD/JPY to the 110.55 obstacle, a break of which could send the pair further in the upwards direction, potentially aiming for the 110.95 level. That level acted as a strong resistance on May 6th.
The Aussie was the main loser among the G10s. Yes, it opened Monday with a gap and continued trading north for a while, after the center-right Liberal/National Coalition surprisingly won Australia’s federal elections, but the recovery remained short-lived. Remember that on Friday, we already noted that a Liberal/National victory could prove positive for Aussie, but we also said that Aussie traders appear to be more focused on changes to the broader market sentiment, and even more on expectations surrounding the RBA’s future course of actions.
Our view was confirmed by the overnight slide in the Aussie, following the release of the RBA minutes and a speech by Governor Philip Lowe. In the minutes, there was even more emphasis on the cut case, with members noting that their central forecast scenario was based on the assumption that interest rates will be in line with market pricing, which suggests lower rates over the next six months. They also added that this means, without easing over the next six months, growth and inflation outcomes would be expected to be less favorable than the central scenario. A couple of hours after the minutes, Governor Philip Lowe said that the Board will consider the case for a rate cut at the June meeting, adding that growth and jobs forecasts would have been softer without the assumption of rate cuts.
The tumble in the Aussie suggests that the minutes and Governor Lowe’s remarks prompted market participants to increase bets with regards to a rate decrease in June. Indeed, according to the ASX 30-day interbank cash rate futures implied yield curve, they now assign an 80% chance for that to happen. Ahead of the minutes, that probability was slightly above 50%. Looking ahead, we expect the Aussie to continue drifting south, at least heading towards the June meeting. Apart from increased expectations over a June rate cut, further tensions between China and the US may be another reason for AUD-traders to add to their short positions.
Yesterday, during the Asian morning, EUR/AUD opened with a huge gap to the downside. The pair managed to fill a part of that gap straight away, but was hit by the bears again, causing the rate to slide lower. EUR/AUD ended up testing the short-term upside support line drawn from the low of April 21st, which once again held the rate from falling further. This morning we are seeing the bulls already driving the pair above yesterday’s high, at 1.6200, and almost filling the above-mentioned gap. In our view, there is a good chance to see a further move higher, as it seems that the buying momentum started picking up again.
Given that EUR/AUD already broke above yesterday’s high, at 1.6200, and almost filled the gap, this gives hope to more bulls, who wish to join in. The pair could easily travel towards one of the key areas of last week, at 1.6255, which held the rate down. We may see EUR/AUD stalling around there, or even retracing slightly lower. But as long as the pair continues to trade above the aforementioned upside line, we will stay positive, at least for a while. If the bulls take charge again and this time break the 1.6255 barrier and the rate stays above it, this might increase the pair’s chances of traveling higher towards the 1.6305 zone, marked by the high of January 4th.
In order to shift our near-term view to the downside, we would first need to see a break of the previously mentioned upside line and then a drop below the 1.6096 hurdle, marked by yesterday’s low. This way, the pair would confirm a forthcoming lower low, signalling a possible change in the short-term trend. EUR/AUD could then travel towards the 1.6030 obstacle, a break of which may send the rate to test the psychological 1.6000 zone, which is near the low of May 10th.
Following the RBA minutes and Governor Lowe’s speech, the calendar appears relatively light today, at least in terms of economic indicators. We only get the UK CBI industrial trends orders for May and the US existing home sales for April. The UK CBI index is forecast to have remained unchanged at -5, while US existing home sales are anticipated to have risen 2.7% mom, after sliding 4.9% in March.
With regards to the energy market, we get the API (American Petroleum Institute) weekly report on crude oil inventories for the week ended on May 17th, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning Wednesday, New Zealand’s retail sales for Q1 are due to be released, with the forecasts suggesting a slowdown in both headline and core sales. Japan’s trade balance for April and core machinery orders for March are also scheduled to be released.
We also have five speakers on the agenda: During the European morning, ECB Vice President Luis de Guindos will speak, while later in the day, we will get to hear from Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren. During the Asian morning Wednesday, BoJ Board member Yutaka Harada and St. Louis Fed President James Bullard will step up to the rostrum.
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