Summary: Signals from US President Trump that trade tariff wars with China may abate soon saw risk sentiment steady. Officials from both countries said they would continue their trade negotiations. USD/JPY rebounded, up 0.4% to 109.65 at the NY close. The Euro slipped 0.26% to 1.1205 (1.1225) weighed by Italian threats to break the EU budget rule on debt levels. Sterling slumped 0.45% to 1.2905, 2-week lows on lower than expected wage growth in the March quarter. While Wall Street stocks were higher, risk currencies were little changed. The Australian Dollar ended at 0.6945 (0.6945), the Kiwi at 0.6573 (0.6570), and the Canadian Dollar at 1.3468 (1.3478). EM currencies finished up against the Greenback. USD/CNH slipped to 6.9050 from 6.9130.
The DOW rebounded 1.13% to 25,588 (25,285). The S&P 500 was up 1.12% to 2,839. (2,807). US bond yields rebounded. The 10-year yield was up 1 basis point to 2.41%, 2-year yields rose 6 bp.
Economic data released yesterday saw Japan’s Current Account miss forecasts at JPY 1.27 trillion against a forecast of JPY 1.71 trillion. Germany ZEW Economic Sentiment Index underwhelmed, falling to -2.1 in May against an expected 5.1 and April’s 3.1. UK Wage growth in Q1 fell to 3.2% from 3.5% in the previous quarter and missing forecasts of 3.4%.
- USD/JPY – The Dollar rebounded after more positive tones from both China and the US on their trade tariff fight lifted equities. USD/JPY rose to an overnight high of 109.774 before steadying at 109.65. Uncertainty on a trade deal continues.
- EUR/USD – the Euro slipped 0.26% to 1.1205 (1.1225) on the fall in German ZEW Economic Sentiment and concerns over Italy. Italian Deputy PM Matteo Salvini said his country was ready to break EU Budget rules on debt levels if necessary, to spur employment. However, his coalition partner Luigi Di Maio said it was “pretty irresponsible” to create market tensions by speaking about Italy’s high debt levels.
- AUD/USD – the Battler ended dead flat at 0.6945 after trading to 0.69349, fresh lows since the January flash-crash. Despite the climb in USD/JPY and equities, risk currencies were little changed. Australian and Chinese economic reports due today could change that.
On the Lookout: The strong rebound in the equity markets from more positive risk sentiment did not flow on to overall Dollar strength. FX markets remain sceptical of any trade deal and the uncertainty is set to continue.
Economic reports today will determine the extent of the renewed slowdown in activity.
Australian Q1 Wage Price Index and Westpac’s Consumer Sentiment Index (April) start the Asian calendar. China’s big trifecta of Industrial Production, Retail Sales and Fixed Asset Investment follow. Japan reports on its Preliminary Machine Tool Orders (y/y) for April.
European data begin with Germany’s Preliminary Q1 GDP followed by Eurozone Q1 Flash GDP.
Canadian Headline, Core and Trimmed-Mean CPI reports start the North American day.
US Headline and Core Retail Sales will be keenly awaited with spending essential to the US economy. Both Headline and Core Sales are expected to slow down in April.
US Empire State Manufacturing Index, Capacity Utilisation Rate, Industrial Production and TICS Long-Term Purchases round up a busy economic schedule.
Trading Perspective: A prolonged trade tariff war between China and the US will hurt the US just as much as the other countries. The Dollar’s rally yesterday was mainly against the Yen and the European currencies. Risk currencies were unchanged while the EM’s rose versus the Dollar.
Speculative market positioning is still long USD bets are multi-year highs. According to Saxo Bank, total net Dollar long bets saw a small reduction by $0.6 billion to $34.5 billion after hitting December 2015 highs. Most of the reduction was due to an 8% reduction on JPY shorts following the rise in trade hostilities between the US and China. Dollar long bets remain against the Euro, Pound, Yen, Aussie, Kiwi, Canadian Dollar, Swiss Franc, and Brazilian Real. The Russian Rouble and Mexican Peso are the exceptions out of the 10 IMM currencies, where specs are short USD.
The overbought USD condition is susceptible to a shake-out which could happen in the short term.
- USD/JPY – The Dollar rallied to a high of 109.774 before easing to 109.65. The continuing uncertainty over the trade tariff war between China and the US will keep USD/JPY under pressure. While there has been a reduction of speculative JPY shorts, total net JPY shorts for the week ended May 9 were at -JPY 91,717 contracts. USD/JPY has immediate resistance at 109.80 and 110.10. Immediate support can be found at 109.30 followed by 109.10. Japanese importers will keep the downside supported. Look to sell rallies with a likely range today of 109.30-109.80.
- EUR/USD – weaker German ZEW economic sentiment, worries about Italy’s government policies and the risk of US trade sanctions on the EU will weigh on the Single currency. The biggest factor supporting the currency is market positioning. According to the Saxo Bank Commitment of Traders/CFTC report, net speculative EUR short bets increase in the week ended May 7. Net Euro short bets rose to -EUR 106,105 contracts from -EUR 105,544. Which are still at multi-year highs. Immediate support lies at 1.1195 followed by 1.1175. Immediate resistance can be found at 1.1225 and 1.1250. Look to buy dips with a likely range of 1.1195-1.1235.
- AUD/USD – Market sentiment remains overwhelmingly bearish on the Aussie which continues to grind lower. The Battler though, managed to hold and closed flat at 0.6945. The overnight low traded was 0.69349. Today sees crucial Australian Wage Price Index, where wage growth needs to see a significant increase to erase downside inflation fears. The Australian Federal election is days away. Speculative market positioning saw a small decrease in net speculative Aussie shorts to -AUD 57,049 from -AUD 59,005. Immediate support lies at 0.6930 followed by 0.6900. Immediate resistance can be found at 0.6960 (overnight high) and 0.6990. Look for a likely trading range today of 0.6920-0.7020. Prefer to buy dips, a correction is overdue.
Happy trading all.