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by Charalambos Pissouros

US-China Trade Spat Heats Up, USD Hit by Disappointing PMIs

Risk aversion intensified yesterday, with EU and US indices ending their trading in the red. This may have been due to Chinese officials’ remarks that if the US wants to continue talks, it needs to correct its wrong actions. The dollar came under selling pressure, losing its safe-haven appeal, perhaps due to the disappointing preliminary Markit PMIs for May. PMIs disappointed in the Eurozone as well, weighing on the euro, but the common currency was able to recover, taking advantage of the greenback’s weakness.

Equites Hammered by Increased US-China Tensions

The dollar traded lower against all but one of the other G10 currencies yesterday and during the Asian session Friday. It underperformed the most against JPY and CHF, while the only currency against which the greenback managed to eke out some gains was CAD.

USD performance G10 currencies

The yen and the franc were the main gainers, suggesting that markets continued trading in a risk-off mode, despite the dollar not putting on its safe-haven suit. Indeed, EU and US indices were a sea of red yesterday, all losing more than 1%. The negative sentiment eased somewhat during the Asian morning, with Japan’s Nikkei closing only 0.16% down and China’s Shanghai Composite ending its trading virtually unchanged (+0.02%).

Major global stock indices performance

The extra fuel in investors’ concerns was added after China said that wrong actions from the US have escalated trade tensions and that if they want to continue negotiating, they need to correct those wrong actions first. Speaking to reporters at the White House, US President Trump said that Huawei is “very dangerous”, but also noted that the tech giant could be included in a possible deal with China, which may have been the reason behind the easing in risk aversion during the Asian trading.

However, with China not willing to return to the negotiating table unless Trump “unblocks” Huawei, we see the case for a deal taking flesh in the near term as a hard task. Even when investors’ appetite rebounded on Tuesday, we were reluctant to trust any long-lasting recovery and the market reaction on Wednesday and Thursday proved us right. We believe that market participants will continue abandoning risk assets and seeking shelter in safe havens until the two nations show true and concrete signs that they are willing to work things out.

As we noted in the past, among currency pairs, one of our favorite proxies for gauging chances in the broader market sentiment is AUD/JPY. During periods of fear and uncertainty, the yen tends to attract safe haven flows, while the risk-linked Aussie tends to weaken, especially if the concerns are directly linked to China, Australia’s main trading partner. The Aussie could also continue being dragged down by expectations over a rate cut by the RBA at its upcoming meeting, scheduled for June 4th.

Nasdaq 100 - Technical Outlook

Nasdaq 100 moved heavily to the downside yesterday, losing around 1.60% of its value. The index is trading below its short-term downside resistance line taken from the high of May 3rd. Looking at our Nasdaq 100 cash index, we can see that after finding support at the 7257 zone, which is also near the lows of March 25th and 28th, the price rebounded and kept retracing higher during after-hours. Even though Nasdaq 100 could try and recover some of its losses, the upside could be limited due to the above-mentioned downside line, hence why we will remain somewhat bearish, at least in the short run.

If Nasdaq 100 continues to drift higher, but fails to overcome the aforementioned downside resistance line, we may see the sellers getting back into the game again and potentially leading the price back down. Once again, the target may be yesterday’s low, at 7257, a break of which might send the index further down, as it would confirm a lower low. Nasdaq 100 could slide all the way to the support area between 7160 and 7181, marked by the lows of March 12th and 13th respectively.

In order for us to abandon the bearish case, at least for a while, we would like to see a break of the previously-mentioned downside line, together with a break of the 7465 barrier, marked near the high of May 21st. This way, Nasdaq 100 could open the door for itself towards higher resistance areas, where one of them could be the 7545 mark, which is the high of May 20th. The price could temporarily stall around that zone, or even correct slightly lower. But if the bears are not able to bring the index back below the previously discussed downside line, the bulls might take advantage of the lower price and lift Nasdaq 100 again. This might force them to bypass the 7545 obstacle and target the 7628 level, marked by the 7628.

Nasdaq 100 cash index 4-hour chart technical analysis

USD Loses its Safe-haven Appeal After PMIs

Back to the greenback, unlike other risk-off periods, when it was seen as a safe haven, it was found as the second worst performer among the G10s today, just behind the Loonie. Yesterday, we noted that the path of least resistance for the dollar may be to the upside, on the belief that the US economy has more chances than other economies to withstand a trade war. However, yesterday’s preliminary PMIs for May revealed a different picture, sparking fears that the US-China spat could eventually hurt the economy more than previously thought.

Both the manufacturing and services indices came in below expectations, with the composite index sliding to 50.9 from 53.0. The manufacturing print hit 50.6, its lowest in 116 months, and just less than a point before slipping into the contractionary zone. In the report it was noted that “trade wars remained top of the list of concerns among manufacturers”, which means that we could start seeing the marks of the latest escalation in other economic data as well soon. The disappointing PMIs may have also prompted investors to add to their Fed cut bets. Indeed, according to the Fed funds futures, the probability for interest rates to be lower by year-end has increased to nearly 78%, from 68% yesterday morning.

Fed funds futures Market vs FOMC rate expectations

The Loonie was the main loser, perhaps driven by the tumble in oil prices. Apart from economic slowdown jitters due to the US-China dispute, oil prices have been also weighed down by increasing inventories. On Wednesday, the EIA (Energy Information Administration) report showed that crude inventories increased 0.768bn barrels last week, instead of sliding by 0.048bn as the forecast suggested.

The euro was also down during the European morning, after both the bloc's preliminary manufacturing and services PMIs for May slid, with the former staying within the contractionary territory for the 4th consecutive month. Strangely, the composite index ticked up to 51.6 from 51.5, but this was still below market expectations of 51.7. Following the latest ECB meeting, when President Draghi noted that policymakers will consider whether they need to mitigate possible side effects of negative rates, another set of disappointing PMIs may have revived speculation for additional policy measures beyond the new round of TLTROs, as well as for another delay in the timing of when interest rates could start rising. Having said all that, EUR/USD rebounded later in the day, due to the greenback’s weakness, reversing the aforementioned losses and even gaining slightly more.

USD/CHF – Technical Outlook

USD/CHF took a big hit yesterday and sold off heavily, breaking below its key support at 1.0050. The pair made its way to the 1.0024 hurdle, where it found good support and then bounced off from it. The rate is trading below its short-term downside line taken from the high of May 7th. We may see a bit more correction to the upside, but if the pair struggles to get back above the 1.0050 barrier, this might invite the sellers again and push the rate down.

As mentioned above, if USD/CHF makes a push higher, but fails to get back above the 1.0050 area, this might result in another round of selling, which may bring the pair to the recent strong support zone at 1.0024. If the bears have enough strength to overcome that zone, such a move would confirm a forthcoming lower low and send USD/CHF towards its next potential target, at the 1.0009 obstacle, marked by the low of April 15th.

In order for us to get comfortable with the upside, we will wait until we see a clear break of the aforementioned downside line and a push above the 1.0080 barrier, which is yesterday’s intraday swing low. This way, the rate-acceleration may continue, pushing the pair towards the 1.0099 obstacle, marked by yesterday’s high. If even then, the bulls remain in the driver’s seat, USD/CHF may be lifted to its next possible resistance area at 1.0120, which held USD/CHF down between May 17th and 22nd

USD/CHF 4-hour chart technical analysis

As for Today’s Events

During the European day, the UK retail sales for April are scheduled to be released. Both the headline and core sales are expected to have slid 0.4% mom and 0.6% mom, after rising 1.1% and 1.2% respectively. This would drive both the yoy rates down to +4.5% and +4.2%, from +6.7% and +6.2%. That said, the yoy rate of the BRC retail sales monitor for the month rose to +3.7% from -1.1%, which shifts the risks of the official data to the upside. In any case, as it has been the case with other economic data, we expect this release to pass largely unnoticed as GBP-traders continue to have their gaze locked on developments surrounding the UK political landscape. Today, PM Theresa May is expected to announce a timetable for her resignation.

In the US, durable goods orders for April are coming out. Headline goods are expected to fall 2.0% mom after increasing 2.8% in March. The core rate is expected to have declined to +0.2% mom from +0.4%. Bearing in mind that the monthly prints of April 2018, which will drop out of the yearly calculation, were -1.7% and +0.9% respectively, we see the case for both the yoy rates to move lower. This is supported by the New Orders sub-index of the ISM manufacturing PMI for the month, which fell to 51.7 from 57.4.

As for the speakers, we have two on the agenda: ECB Governing Council member Ewald Nowotny and BoE Deputy Governor Sam Woods.

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