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by Charalambos Pissouros

US-China Trade Talks Resume, Norges Bank Decides on Interest Rates

Today, a Chinese delegation led by Vice Premier Liu He is scheduled to travel to the US for a critical two-day round of trade talks, in an attempt to avert a tariff increase tomorrow. However, we see the case for the two nations reaching common ground in only two days as a hard task. Apart from the US-China talks, we also have a Norges Bank policy meeting on the agenda, with investors eager to find out whether the Bank will follow Riksbank’s footsteps and push back its hike timing.

Risk Appetite Stays Soft Ahead of US-China Talks

The dollar traded higher against all but one of the other G10 currencies yesterday and during the Asian morning today. The currency against which the greenback failed to eke out gains was the safe-haven JPY, with USD/JPY found virtually unchanged this morning. The main losers were AUD and GBP, with the latter staying under pressure for the third consecutive day, on reports that talks between the UK government and the Labour party may soon collapse, as well as on uncertainty surrounding Theresa May’s future as a PM.

USD performance G10 currencies

Once again, the performance in the FX world suggests that risk appetite remained subdued. Some EU indices closed in positive territory, perhaps following Trump’s tweet saying that "China has just informed us that they (Vice-Premier) are now coming to the U.S. to make a deal. We'll see". The German DAX was the main gainer, also aided by upbeat earnings reports and better-than-expected industrial output data. Having said that though, Wall Street revealed a more cautious investor stance, with Dow closing virtually unchanged and S&P and Nasdaq sliding 0.16% and 0.26% respectively. The reason may have been China’s warnings for retaliation in case the US indeed increases the tariff-rate on Chinese goods. The “risk-off” mode intensified during the Asian morning today. Japan’s Nikkei 225 and China’s Shanghai Composite declined 0.93% and 1.48% respectively.

Major global indices performance

Today, a Chinese delegation led by Vice Premier Liu He is scheduled to travel to the US for a critical two-day round of trade talks, in a last-ditch attempt to avert the tariff increase that US President Trump has threatened to impose on Friday. Judging by the negative market environment, it seems that investors are skeptical on that front, and, in our view, rightfully so. As we noted yesterday, we see the case for the two nations reaching common ground in just two days as a hard task, and China’s retaliation warnings make it even harder, we believe. Reports that the reason behind Trump’s threats was China’s backtracking in almost all aspects agreed so far, further strengthen that view.

We believe that the US will indeed raise the tariff rate on USD 200bn worth of Chinese goods, to 25% from 10%, on Friday, but given that this appears to be largely factored in, what happens next could largely depend on the headlines surrounding the negotiations. Even if the two nations fail to reach consensus, remarks reviving hopes that this could happen in the weeks to come could allow risk assets to rebound somewhat and bring safe havens under some selling interest. On the other hand, anything suggesting that the two nations are nowhere close to an accord could add to concerns of further escalation in the foreseeable future, and thereby keep investors’ risk appetite subdued for longer. Remember that on Sunday, apart from Friday’s tariff increase, Trump also threatened that USD 325bn of additional Chinese imports will be taxed shortly, at a 25% rate.

Nikkei 225 – Technical Outlook

Nikkei 225 has been feeling the heat lately, as it continues to sell-off rapidly, which led to a break of its medium-term upside support line taken from the lowest point of December. It seems that buyers are still looking for that perfect floor where to step in and drive the index back up, but so far, they are unsuccessful. Recently, the Japanese index found good support near the 21300 hurdle, from which it rebounded slightly. For now, we will remain somewhat negative over the short-term outlook, but we will wait for a confirmation break first, before examining further downside.

A drop below the 21300 hurdle could increase Nikkei’s chances for a further slide, where the next potential support area might be seen near the 21160 zone, marked by the lows of March 13th and 29th. The price might stall, or even rebound from there, but if there is still a lack of more buyers, the index could reverse to the downside again. Such a move could re-test the 21160 obstacle, a break of which might drag Nikkei 225 below the 21000 mark, towards the 20962 area, which is the low of March 28th.

On the other hand, if Nikkei 225 makes a strong push higher and breaks above the 21585 barrier, this might lift the buyer confidence, which could lead the price towards the 21735 hurdle, marked by the high of April 4th and the intraday swing high of May 7th. Even if around there, the index slows its acceleration a bit and doesn’t retrace back to much, this might still keep the bulls in the field. It may allow them to regroup, and give Nikkei another push higher. A break above the 21735 zone could open the door to the 21910 level, which is the low of May 5th and 6th. Also, this is where the index could test the aforementioned upside support line, but this time from underneath. 

Nikkei Cash index 4-hour chart technical analysis

Will the Norges Bank Push Back its Hike Timing?

Following the RBA on Tuesday and the RBNZ on Wednesday, today, it’s the turn of the Norges Bank to decide on monetary policy. Expectations are for Norwegian policymakers to keep rates unchanged at +1.00% and thus, given that we will not get updated economic projections, all the attention is likely to fall on the accompanying statement.

Norges Bank Interest Rates Norway

When they last met, officials decided to raise their key interest rate to 1.00% from 0.75% as was widely anticipated and noted that their current assessment suggests that the policy rate will most likely be increased again “in the course of the next half-year”. The statement accompanying the decision had a hawkish flavor, with officials noting that the Norwegian economy appears to be stronger than anticipated and that the policy rate forecast indicates a slightly faster rate rise in 2019, even though it is somewhat lower further out.

Having said all that though, following the Riksbank’s decision to push back the timing of when it expects to increase rates again, apart from Swedish currency, the Norwegian Krone slid as well, perhaps due to fears that the Norges Bank may follow suit. Thus, investors will be eager to find out whether this would be the case at this meeting, or not. In our view, with the Norwegian economy expanding at a solid pace, and inflation above the Bank’s objective, we believe that the Norges Bank could keep its forward guidance unchanged, which could prove positive for NOK. Nevertheless, bearing in mind that Norway is the world’s fifteenth biggest oil producing nation, and one of the main exporters to Europe, the recent weakness in oil prices may keep any NOK gains limited and short-lived. Taking into account monthly data from January 2010, the correlation between Brent oil and EUR/NOK currently stands at -0.81.

Brent vs EUR/NOK

EUR/NOK – Technical Outlook

EUR/NOK continues to climb higher by trading above its short-term upside support line taken from the low of April 22nd. Yesterday, the pair hit the resistance area, roughly around the 9.837 barrier, but then retraced back down a bit. In our view, we may see a small correction towards that upside line, before another leg of buying, hence why we will stay cautiously bullish for now.

As we mentioned above, a small slide could bring the rate to test the 9.798 hurdle or even the aforementioned upside support line, which if remains intact could be a good sign for the bulls to step in again. The pair may travel back to the 9.837, but if this time, that barrier fails to withstand the bull-pressure, a break of it could send EUR/NOK towards the 9.880 level, marked by the highest point of March.

Alternatively, if EUR/NOK suddenly breaks the above-mentioned upside line and the rate falls below the 9.771 hurdle, this could attract more seller, which might result in the pair moving further down. The next potential support zones could be the 9.745 and 9.729 levels, where the last one marks the low of May 3rd. There could be a chance of seeing the pair stalling around that area, or even retracing back up a bit. But if the bears are still stronger than the bulls, another push lower might bypass the 9.729 obstacle and aim for the 9.696 zone, which acted as a good resistance between April 25th and 30th.

EUR/NOK 4-hour chart technical analysis

As for the Rest of Today’s Events

Apart from the Norges Bank interest rate decision, the agenda includes the US PPIs for April. Both the headline and the core rates are expected to have ticked up to +2.3% yoy and 2.5% yoy, from +2.2% and +2.4% respectively. This could raise speculation that the CPIs, due out tomorrow, may move in a similar fashion, but it is very unlikely to encourage market participants to place any bets with regards to a Fed hike this year.

US CPI vs PPI inflation

According to the Fed funds futures, investors see a nearly 60% chance for interest rates to be lower by year end, despite remarks by Fed Chair Powell at the press conference following the latest FOMC decision that the Committee does not see a strong case for moving in either direction. The Fed Chief will speak today as well but bearing in mind that we heard from him only last week, we don’t expect any material new information with regards to monetary policy.

US Initial jobless claims for the week ended on May 3rd and the nation’s trade balance for March will also be released. Expectations are for initial jobless claims to have declined to 215k from 230k the week before, something that will drive the 4-week moving average up to 217k from 212.50k. The US trade deficit is forecast to have widened to USD 50.2bn from USD49.40bn. We get trade data for March from Canada as well, with this country’s deficit expected to have narrowed to CAD 2.45bn from CAD 2.90bn.

As for tonight, during the Asian morning Friday, the RBA releases its quarterly Monetary Policy Statement, while the BoJ publishes the Summary of Opinions for its latest policy gathering.

With regards to the speakers, apart from Fed Chair Powell, Atlanta Fed President Raphael Bostic and Chicago Fed President Charles Evans will step up to the rostrum as well.

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