Markets continued trading in a “risk on” mode, aided by an FT report saying that US and China are drawing closer in securing a trade deal. Trade talks are set to resume today in Washington, with China’s Vice Premier Liu He preparing to meet with US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin. The pound was the main gainer among the G10 currencies, rallying after May said that she would seek another Brexit delay.
The dollar traded lower against the majority of the other G10 currencies, perhaps as US Treasury yields pulled somewhat back after Monday’s decent advance. The main gainer was the pound, with far behind, NOK, EUR and AUD taking the second, third and fourth place respectively. The greenback gained only against the safe haven JPY, while it traded virtually unchanged versus SEK, CAD and NZD.
Although it is not crystal clear by the broader FX performance, the rebound in the Aussie and the weakening of the yen suggest that market sentiment may have remained supported on Tuesday. Indeed, most major EU indices closed their sessions in the green, thought later int the day, the US ones ended mixed. Nasdaq was up 0.25%, S&P 500 closed virtually unchanged, while Dow Jones was 0.30% down, weighted on by Walgreen’s disappointing earnings. That said, risk appetite was refueled again during the Asian morning Wednesday, with Japan’s Nikkei 225 and China’s Shanghai Composite rising 0.97% and 1.24% respectively.
The catalyst behind the re-boost in investor morale may have been China’s better-than-expected Caixin services PMI for March as well as an FT report saying that a deal between China and the US is closer than ever as the two sides have found common ground in most of the issues standing in their way. The Aussie had also its own reasons to recover a large portion of the RBA-related loses. Australian retail sales for February accelerated from +0.1% mom to +0.8%, the fastest pace since November 2017, while the nation’s trade surplus increased to a new record high of AUD 4.8bn from AUD 4.35bn, beating estimates of a small decline.
Back to the US-China saga, trade talks are set to resume today in Washington, with China’s Vice Premier Liu He preparing to meet with US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin. The two US officials traveled to Beijing last week with the negotiations there ending on a positive note, as both sides reported further progress. We may get similarly optimistic remarks this week, something that could keep risk appetite supported, but, still, a final and sealed accord remains unlikely. As we noted last week, the sealing of a deal is expected to happen at a meeting between US President Trump and his Chinese counterpart Xi Jinping, which according to market chatter could even happen in June. So, it would be interesting to see whether these talks will open the door for the meeting to happen earlier than anticipated.
In the beginning of this week, we saw the Dow Jones Industrial Average cash index breaking above its downside resistance line taken from the high of February 25th. Looking at the DJIA cash index right now, we see that the price is currently struggling to move above the 26270 barrier. But given that the index broke through the aforementioned line and is now sitting at around February’s high, this probably gives the buyers some hope for a potential move higher, at least in the short run.
A good push above the 26270 area could confirm a forthcoming higher high and lift the price higher towards its next potential target, at 26550, marked by the high of October 9th. This is where we may see DJIA stalling initially, until the bulls and the bears figure out who takes control from there. If the bulls are still the ones who are stronger, a break above the 26550 obstacle could lead to the 26780 resistance zone, which held the price down on September 21st and October 4th.
In terms of the downside, in order to consider lower levels again, we would like to see DJIA moving back below the downside resistance line taken from the peak of February 25th, and also below the 26000 hurdle, marked near the high of March 21st. This way we could start looking at some potential lower support areas, like the 25795 zone, which on March 26th played its role as a strong resistance. But if the 25795 zone is seen just as a temporary obstacle on the Dow’s journey south, a break of it could open the door towards the short-term upside support line drawn from the low of February 8th, or the 25500 hurdle, which is near the low of March 27th.
The pound was the best performing currency among the G10s, and for the umpteenth time, the catalyst behind the reaction was Brexit-related news. The British currency gained the most against JPY, SEK, NZD, USD and CAD, while it gained the least versus NOK.
During the European morning Tuesday, sterling continued trading on the back foot, still feeling the heat of UK MP’s failure to break the Brexit deadlock. That said, as we have noted yesterday, a headline was enough to change the picture. Later in the day, PM Thresa May said that she would seek another short-term extension to Article 50, in order to discuss an reach consensus with the Labour leader Jeremy Corbyn. Corbyn was positive in meeting with May, noting that he would be “very happy”, but reiterated that his party is aiming to keep a customs union with the EU, as well as access to the single market.
All this suggests that the Prime Minister may have soften her stance, as she may be willing to discuss the likelihood of staying in a customs union, something that may have eased fears of a disorderly Brexit next Friday. However, we are not as optimistic as many may have turned after the headlines (judging by the rally in the pound). First, agreeing on a customs union would upset Conservative hardliners, and risk ripping her party apart, while second and much more important, in order to secure an extension, May would need consent from all 27 EU member states. When she was given the first delay, EU officials made it clear that another extension would have to be a longer one, which would require the UK to participate in the EU Parliamentary elections, and in order for something like that to be approved, the UK government has to present a clear plan on how it intends to move forward.
In our view, EU officials would have to soften their current stance in order to accept the UK government’s request, something we have no signs for. On the contrary, following May’s statement, the foreign ministers of Germany and France called for more clarity over the UK’s plans, and warned that without a viable plan, the nation would be headed towards a no-deal Brexit in coming days. Having all that in mind, we believe that the landscape for now remains talks, unsuccessful votes in the UK Parliament, and not substantial steps towards securing an orderly exit. Thus, we prefer to stick to our guns and avoid drawing any conclusions with regards to the pound’s forthcoming directional path. Until the picture gets clearer, we expect the currency to remain headline driven.
GBP/JPY continues to trade sideways within a range between roughly the 143.75 and 148.30 levels. Such activity has been ongoing since around the second half of February. After rebounding from the lower side of that range on the last trading day of March, the pair travelled north. From a very short-term perspective there might be a chance for the rate to accelerate a bit more, up until it could hit the upper bound of the range, but from a more medium-term view, GBP/JPY remains side-lined, hence why we will remain neutral overall.
A strong push back above the 146.50 barrier could increase the pair’s chances for a further rise, where the next potential target could be at 147.35, marked near the lows of March 14th and 15th. If that area proves to be too weak to withstand the bull-pressure, a break of it may lift GBP/JPY to the aforementioned upper side of the range, at 148.30, which could stop rate acceleration, at least for a while, until the bulls and the bears figure out who will take control from there onwards.
On the other hand, if GBP/JPY suddenly moves back down and breaks below the 145.50 hurdle, marked by the peak of March 29th, this would also place the rate below its 200 EMA, which could be interpreted as the first negative sign for the pair. This way, the rate may slide towards the 144.95 area, a break of which might temporarily spook the bulls from the field and allow the bears to jump behind the steering wheel. This is when we will target the 144.40 obstacle again, which, if fails to withhold the rate, could open the door back to the lower side of the aforementioned range, at around 143.75.
Today, although investors are likely to keep their gaze locked on Brexit and the US-China trade saga, we also have some data releases on the agenda. During the European morning, we have the final services and composite PMIs for March from several European nations and the Eurozone as a whole. As it is usually the case, the final prints are expected to confirm the preliminary estimates. The bloc’s retail sales for February are also due out and they are expected to have slowed to +0.2% mom from +1.3%, something that will drive the yoy rate down to +2.0% from +2.2%.
From the UK, we get the services PMI for March, which is expected to have slid to 51.0 from 51.3. Under normal circumstances, this is the most important among the three UK PMIs, as the service-sector accounts for around 80% of the total UK GDP. Nevertheless, in the midst of all this uncertainty, it could attract less attention than usual and is unlikely to prove determinant with regards to the pound’s forthcoming directional move.
In the US, the ADP employment report for March is due to be released. Expectations are for the private sector to have gained 184k jobs, fractionally more than February’s 183k. Even though the ADP is the only major gauge we have for the non-farm payrolls, we have to repeat once again that the correlation between the two time-series at the time of the release (no revisions are taken into account), has been low in recent years. Taking into account data from January 2011, that correlation now stands at 0.46. Even in February, when the ADP showed an increase of 183k jobs, the NFP figure was a disappointing 20k.
We also get the final Markit services and composite PMIs for March, as well as the ISM non-manufacturing index for the month. As its usually the case, the final Markit prints are expected to confirm their preliminary estimates, while ISM index is expected to have declined to 58.0 from 59.7.
With regards to the energy market, we get the EIA (Energy Information Administration) inventory data for the week ended on March 29th. Expectations are for a 0.50mn barrels slide following a decline of 2.08mn barrels the week before. That said, yesterday, the API report showed a 2.9mn increase and thus, we view the risks of the EIA data as skewed to the upside.
We also have one speaker on today’s agenda: Atlanta Fed President Raphael Bostic.
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