Aussie Softens on Trade Tensions with China, Loss Limited

Asian markets started with mild risk aversion today but sentiments quickly stabilized. Australian Dollar is pressured after China bans four of its abattoirs, but there is no follow through selling afterwards. While the Aussie is staying soft, it’s holding generally above yesterday’s low for the moment. Canadian Dollar is the second weakest while Yen is the strongest. After all, major crosses and pairs are trading inside yesterday’s range.

Technically, USD/JPY’s breach of 107.49 resistance suggests that corrective fall from 111.71 has completed. Further rise will now be in favor to 109.38 resistance first. 133.17 minor resistance in GBP/JPY will be a focus and break will further indicate Yen’s weakness. GBP/JPY would then target 135.74 resistance. AUD/USD’s retreat this week has been rather shallow so far. Attention will be on the direction of the breakout, through 0.6569 resistance or 0.6372 support.

In Asia, Nikkei closed down slightly by -0.12%. Hong Kong HSI is down -1.36%. China Shanghai SSE is down -0.17%. Singapore Strait Times is down -0.97%. Japan 10-year JGB yield is down -0.0167 at -0.006. Overnight, DOW dropped -0.45%. S&P 500 rose 0.02%. NASDAQ extended recent strong rally and rose 0.78%. 10-year yield rose 0.044 to 0.726.

Trump rejects trade deal renegotiation with China

US President Donald Trump bluntly rejected the idea of renegotiating the trade deal with China. The comment came after reports that some Beijing advisers were pushing to reopen the signed agreement. When asked if he would rework the phase one trade deal, Trump said, “No, not at all. Not even a little bit. I’m not interested. We signed a deal. I had heard that too, they’d like to reopen the trade talk, to make it a better deal for them.”

The Chinese state-run hawkish tabloid global times reported that malicious attacks by the United States have ignited a “tsunami of anger” among Chinese trade insiders A trade adviser told the government, “it’s in fact in China’s interests to terminate the current Phase 1 deal”. And, “the U.S. now cannot afford to restart the trade war with China if everything goes back to the starting point.”

It’s noted that China could invoke a clause to trigger renegotiation “in the event of a natural disaster or other unforeseeable event”. But Trump insisted that “if that happens, we’ll do a termination and we’ll do what I can do better than anybody.”

China bans four Australian abattoirs as tensions rise

Trade tensions between China and Australia continued to escalate. Four Australian red meat abattoirs were banned from importing to China. It comes just days after China warned of the plan to impose 80% tariffs on Australian barley. Trade Minister Simon Birmingham tried to tone down the suspension as just some “technical issues”. He added, “there are many other meat processing facilities that will continue under their approved permits to send product to China as they do, indeed, around the rest of the world.”

But some analysts believed China’s moves are retaliations to Australian government’s push for independent inquiry on coronavirus pandemic that started in Wuhan. Chinese Ambassador to Australia Jingye Cheng warned last month that Chinese public may boycott Australia products for the push for coronavirus inquiry. In an Australian Financial Review in April, Cheng said, “maybe also the ordinary people will say why should we drink Australian wine or to eat Australian beef?”.

Australia NAB business conditions dropped to -34, broad-based deterioration across industries

Australia NAB Business Confidence rose to -46 in April, up from -65. But that remain well below the trough of 1990s recession. Business Conditions, however, dropped to -34, down from -22, below the level seen in the 08/09 financial crisis. Looking at some details, trading conditions dropped form -19 to -33. Profitability conditions dropped from -28 to -35. Employment conditions also dropped from -20 to -35. Forward orders dropped from -28 to -36, suggesting activity is likely to weaken further in the near term.

Alan Oster, NAB Group Chief Economist “confidence saw a rebound in the month after the sharp fall last month, but this provides little comfort given it remains around twice as weak as the 1990s recession. Business conditions declined further in the month, with a broad-based deterioration across industries”.

“We see a recovery in growth late this year, but even though it could be a solid bounce the level of output is not expected to be recovered to pre-COVID levels until early 2022. We expect unemployment to match this pattern, falling in 2021 but remaining above 7%. This all points to required ongoing policy support for some time” said Oster.

BoJ Kuroda: Near term focus is to smoothen corporate financing and stabilize markets

In the semi-annual testimony to parliament, BoJ Governor Haruhiko Kuroda warned that “Japan’s economy is in an increasingly severe state”. Outlook will “remain severe for the time being.” He pledged to “do whatever we can as a central bank, working closely with the government.”

For the near term, focus of monetary policy is to “smoothen corporate financing and stabilize markets”. Though, there is no huge risk of sharp credit contraction as domestic financial institutions have sufficient capital buffers.

As for the steps to ease monetary further, he said, “we’re ready to take sufficient steps judged necessary at the time”. The measures could include expanding asset purchases, increasing market operations tools or cutting interest rates further.

Elsewhere

China CPI slowed to 3.3% yoy in April, down from 4.3% yoy, missed expectation of 3.7% yoy. PPI dropped -3.1% yoy, down form -1.5% yoy, missed expectation of -2.6% yoy. US CPI will be the main focus today. Attention will also be on scheduled speeches of some Fed officials, including Harker, Quarles and Mester.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6445; (P) 0.6503; (R1) 0.6549; More…

AUD/USD is staying in range of 0.6372/6569 and intraday bias remains neutral first. On the upside, above 0.6569 will extend the rebound from 0.5506 and target 0.6670 key resistance. On the downside, break of 0.6372 support should confirm short term reversal and bring deeper fall to 38.2% retracement of 0.5506 to 0.6569 at 0.6163 first.

In the bigger picture, there is no clear sign of trend reversal yet. The larger down trend from 1.1079 (2011 high) is still in favor to extend. 61.8% projection of 1.1079 to 0.6826 from 0.8135 at 0.5507 is already met. Sustained break there will pave the way to 0.4773 (2001 low). On the upside, however, sustained break of 0.6607 will suggest medium term bottoming and turn focus to 0.7031 resistance next.

Economic Indicators Update