Summary: FX saw a muted, nervous start in early Asia with risk-off sentiment prevailing as trade tensions build between the US and China. Golden Week holidays kick off today with Japanese and Chinese markets closed for most of the week. Over the weekend, US President Trump and Treasury Secretary Mike Pompeo escalated trade tensions with China suggesting that the Communist Party’s leadership downplayed the severity of the coronavirus, increasing imports and decreasing exports of medical supplies. Trump threatened to impose new tariffs on China over the coronavirus crisis.
In thin, illiquid trading the Aussie and Kiwi stayed on the back foot, sustaining losses from Friday. AUD/USD, down 1.4% on Friday, dropped from its 0.6420 NY close (0.6515 Friday) to 0.6401. The New Zealand Dollar slumped to 0.6040 from 0.6060 NY close and 0.6103 Friday. The Euro dipped to 1.0963 from 1.0980 New York close (1.0952 Friday start). Against the safe-haven Yen, the Dollar dropped 0.55% to 106.92 (107.20 Friday). Sterling was changing hands against the Greenback at 1.2490 (1.2588 Friday). USD/CAD rallied 0.9% to 1.4100 (1.3940 Friday morning). Canada appointed Tiff Macklem, an experienced central banker as the 10th and new Governor of the Bank of Canada. Emerging Market currencies and risk assets slumped. The USD/CNH pair (onshore US Dollar/Chinese Yuan) climbed to one-month highs at 7.1350 from 7.0825 Friday. In early Asia, USD/CNH traded up to 7.1510. Against the South African Rand, the Greenback was trading 1.3 % higher at 18.84 from 18.52. Wall Street stocks retreated. The DOW finished 2.11% lower to 23,710 (224,245 while the S&P 500 was 2.13% down in late New York to 2,826 from 2,828.
On the COVID-19 front, Gilead Sciences donated its entire supply of Remdesivir, the drug that has shown success in helping patients recover faster, to the US government.
Data released Friday saw US ISM Manufacturing PMI’s fall in April to 41.5 from 49.1 in March but better than forecast of a fall to 36.7.
On the Lookout: Amidst thin trading conditions due to the start of Golden Week celebrations in China and Japan, we have another busy data week ahead.
Today kicks off with Australia’s Building Approvals and ANZ Job Advertisements. Euro area reports follow with Switzerland’s Final Manufacturing PMI’s. Shortly after, Italian, German, French and Eurozone PMI’s follow. Eurozone Sentix Investor Confidence Index and the European Union’s Economic Forecasts follow. Finally, the US releases its April Factory Orders report.
Tomorrow (Tuesday) the RBA meets on interest rates followed by it policy Statement.
On Wednesday, New Zealand Payrolls, Euro area Services PMI’s and the US ADP Non-Farms Payrolls data are released. Thursday (May 7) sees Australian and Chinese Trade Balances, US Weekly Jobless Claims as well as the Bank of England’s interest rate meeting and policy statement, and US Weekly Unemployment Claims. Finally, on Friday Canadian and US Non-Farms Employment Changes and Unemployment rates for April are released.
Trading Perspective: As Washington ramps up its accusations on the failure of China’s leadership to report the coronavirus outbreak in late January to the rest of the world, expect the risk-off theme to prevail in Asia. Liquidity will be at a premium with Japan and China on holiday today.
Initially, as the risk-off mood extends we can expect the Yen to outperform while Commodity and Emerging Market currencies will continue to decline against the US Dollar.
The Aussie, Kiwi, Loonie and Emerging Market currencies are headed south.
However, should the situation worsen, and the US imposes capital controls on China, the Greenback could suffer as outflows resulting from a shift from USD reserve holdings into EUR, GBP, JPY and other reserve proxies.
EUR/USD – 1.1010 Provides Strong Resistance, Slide to 1.0900 Likely
The Euro finished in New York at 1.0980, up 0.22% from its Friday opening at 1.0950. EUR/USD traded to an overnight and 4-week high at 1.10189 before easing. In early Asian trade, the shared currency slipped to 1.0953 before settling.
EUR/USD has immediate support at 1.0935 (overnight low 1.09345) followed by 1.0900 and 1.0870. Immediate resistance on the day is found at 1.1000 and 1.1020. Expect EUR/USD trading to continue subdued amidst a weakening of Commodity and Emerging Market currencies. Today sees the release of Euro area Manufacturing PMI’s as well as the EU economic forecasts and Eurozone Sentix Investor Confidence Index.
Look for the Euro to trade within a likely range today of 1.0920-1.1020. Let’s remember that speculative long market positioning in the Euro has been near their biggest totals since mid-2018. That has yet to correct itself. Prefer to sell any rallies above 1.1000. The next big move in the shared currency is south, not north.
AUD/USD – Slip-Sliding Away, 0.6400 Threatened, Expect 0.6300-0.6450 Range
The Australian Dollar quickly reversed direction, turning south big-time as risk sentiment soured. Traders questioned whether Australian and New Zealand success in containing the coronavirus outbreaks would outweigh the negatives of a US-China trade war on the global economy. The verdict was a big NO and both currencies were punished lower.
In thin, illiquid trading this morning, AUD/USD slipped to an intraday low at 0.6401 initially before giving way to a break of 0.6400 cents to its current 0.6375 level. Just Thursday evening in NY trade the Aussie rose to 0.6570, just shy of the 0.6600 cent mark. The proverbial old-time saying which described AUD/USD trade in the 90’s, “up the stairs, down the elevator” returned to haunt any new Aussie bulls.
This morning, the Aussie looks shaky and the next support level can be found at 0.6340. Immediate resistance now lies at 0.6430, after the Battler closed at 0.6420 in New York. The next resistance level lies at 0.6470. Look for a likely range today of 0.6340-0.6440 with the preference to sell rallies toward 0.6450.
USD/CAD – New BOC Head Seen as Dovish, 1.40 Base, Next 1.4250
The US Dollar spiked against the Canadian Loonie in early Asian trade to an intraday high so far at 1.4145 from its New York close of 1.4085 and Friday mornings 1.3942. On Friday Canada appointed a new governor of the Bank of Canada (central bank). Tiff Macklem, an experienced central banker and a leading voice for the country’s transition into a green economy was appointed the 10th BOC governor. Macklem replaces Stephen Poloz in the Bank of Canada on June 2.
In his initial press conference, Macklem warned that Canada would not kick back to normal after the Covid-19 induced crisis. The new BOC head said he was comfortable with the lower bound of rates at 0.25% while guaranteeing a commitment to providing essential liquidity to the system.
The Canadian Loonie is still considered a Commodity currency, and in a risk-off scenario will weaken against the Greenback and other risk currencies (Yen). USD/CAD has immediate resistance at 1.4150 followed by 1.4200. Immediate support can be found at 1.4090 followed by 1.4050 and 1.4000. In the current scenario, expect the USD/CAD to trade in a likely, choppy range between 1.40-1.42. Prefer to buy dips.