Sun, Jan 26, 2020 @ 20:32 GMT

Position trading update: Entered GBP/USD short

    As planned in our weekly report, we entered GBP/USD short today at 1.3150, as the pair recovered to 1.3166. Stop is placed at 1.3300, slightly above 1.3297 resistance.

    Our view is unchanged that corrective rise from 1.2661 has completed with three waves up to 1.3297, just ahead of 38.2% retracement of 1.4376 to 1.2661 at 1.3316. Another fall is expected through 1.3042 support to retest 1.2661 low.

    There is prospect of resuming whole decline from 1.4376. Hence, if the trade turns out as expected, we’ll monitor downside momentum to decide whether to exit at around 1.2661, or hold through it.

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    Today’s top mover GBPCAD: Medium term down trend ready to resume through 1.6594 low

      It’s hard to say who’s the biggest mover today. EUR/CAD moves more in terms of percentage. But GBP/CAD moves more in terms of pips.

      Actually they’re very close. CAD strength is overwhelming after hawkish BoC hike. Meanwhile Eurozone and UK both have their own problems, which are indeed EU related.

      Let’s have a look at GBP/CAD. It’s rather clear that price actions from 1.6594 are a three-wave corrective pattern. It’s very likely completed at 1.7285, just ahead of 38.2% retracement of 1.8415 to 1.6594 at 1.7290. Further fall should be seen in near term 1.6594 low first. Break will confirm resumption of the down trend from 1.8415. Next target will be 61.8% projection of 1.8415 to 1.6594 from 1.7285 at 1.6160. Even if there will be interim recovery before breaking 1.6594, we don’t expect a break of 1.7285 resistance.

      In the bigger picture, it does look like GBP/CAD has completed a three-wave correction from 1.5746 to 1.8415, after hitting 50% retracement of 2.0971 to 1.5746 at 1.8359. So there is prospect of breaking 2016 low at 1.5746 in medium term. That would depend on the downside momentum after taking out 1.6594 low.

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      US Empire State manfacturing rose to 10.1, but future conditions dropped to 3-year low

        US Empire State manufacturing general business conditions index rose 10.1 in April, up from 3.7 and beat expectation of 8. 33% of respondents reported improved conditions, 23% said worsened. New orders index rose 5pts to 7.5. Shipments rose 1pts to 8.6. However, index for future business conditions dropped a massive -17 pts to 12.4, lowest in more than three years.

        New York Fed noted in the release that growth picked up somewhat but remained fairly subdued. New orders rose slightly, and shipments continued to grow modestly. Delivery times and inventories both increased. Labor market indicators pointed to ongoing employment gains and a small increase in hours worked. The prices paid and prices received indexes moved lower, pointing to a slowing in both input price increases and selling price increases. Indexes assessing the six month outlook suggested that firms were much less optimistic about future business conditions than last month.

        Full release here.

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        UK Hunt warns of no Brexit, EU urges a clear decision

          UK now enters into a crucial week with important Brexit votes. Prime Minister Theresa May failed to secure the needed changes to Irish backstop. EU chief negotiator Michel Barnier threw out a package of “concessions” that was rejected bluntly by the UK government. Foreign Minister Jeremy Hunt insisted that the meaningful vote on the Brexit deal will still go ahead on Tuesday, March 12. But the Sunday Times predicted that May will lose by 230 votes again, the same margin of defeat as in January for effective the same deal in the Commons.

          Hunt now turned to Brexiteer Tories and threatened that vote down the deal would open the door to no Brexit. He said, “If you want to stop Brexit you only need to do three things: kill this deal, get an extension, and then have a second referendum. Within three weeks those people could have two of those three things … and quite possibly the third one could be on the way.”

          On the other hand, the EU is trying to push the UK to make up it’s mind clearly, rather that getting an extension with no purpose. France’s EU affairs minister Nathalie Loiseau said “More time, to do what? We’ve had two years … If there’s nothing new, more time will not do anything other than usher in more uncertainty, and uncertainty just creates anxiety… It’s not time that we need, but a decision.”

          Manfred Weber, the chairman of the European People’s Party in the European Parliament also said “May should end her zigzag course.” Also, “British politicians, and I mean Labour leader Jeremy Corbyn in particular, must finally put their own careers and party considerations behind them and look at the country’s interests again.”

          In short, there will be another parliamentary vote on the Brexit deal on March 12, next Tuesday. As it’s defeated, a vote on no-deal Brexit will then be held on March 13 to see if there is explicit consent on this path. If not, there will be another vote on Article 50 extension on March 14.

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          Sterling rises as Brexit deal finally clinched in Brussels

            Sterling surges on news that a Brexit deal is finally clinched in Brussels today, after marathon discussions this week. The news also take stocks and commodity currencies higher. The agreement came just a few hours ahead of the EU summit. European Commission President Jean-Claude Juncker said in a letter that he would recommend EU27 leaders to approve the deal. And it’s a “high time” to complete the Brexit process.

            UK Prime Minister Boris Johnson also said “we have a great new Brexit deal”. His spokesperson added that Johnson is confidence that the new Brexit deal will go forward for a vote in the parliament on Sunday. And, “The public would expect if the deal is passed, for MPs to do everything they can to pass it on time and yes we are confident that we can do that, referring to leaving EU on October 31.

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            Limited loss in Yuan and Chinese stocks as trade war escalation shrugged

              The financial markets reactions to new round of US tariffs on China are so far rather muted. Nikkei is actually rising over 1% at the time of writing. Hong Kong HSI is down -0.72%, Singapore Strait Times is down -0.55%. China’s Shanghai SSE dipped to 2644.30 but recovered. It’s now trading down -0.12% only at 2648.5, still kept above 2638 key support level (2016 low).

              In the currency markets, Dollar turns soft again after a brief lift from the trade war news. It’s trading as the weakest one together with Yen for now. Australian Dollar and New Zealand Dollar are the strongest ones.

              USD/CNH (offshore Yuan) edged higher to 6.8930 earlier today but there is no follow through buying to push it through 6.8959 minor resistance yet.

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              UK PM May to EU: It’s your interest that we leave with a deal

                According to the pre-released extracts, UK Prime Minister Theresa May is expected to tell EU in a speech today that “it is in the European interest for the UK to leave with a deal”. And, “just as MPs will face a big choice next week, the EU has to make a choice, too.”

                May is still seeking legally binding assurances from EU that the Irish backstop, if triggered, will be temporary. May will say “we are working with them but the decisions that the European Union makes over the next few days will have a big impact on the outcome of the vote.”

                Without any fundamental change regarding Irish backstop, there is practically no chance for May to get her Brexit deal through the Parliament on March 12, next Tuesday. A vote on no-deal Brexit will then be held on March 13 to see if there is explicit consent on this path. If not, there will be another vote on Article 50 extension on March 14.

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                IMF: Global growth a little slower than October forecast due to trade war

                  IMF Director of Asia and Pacific department Changyong Rhee indicated that US-China trade war is already having an impact on business confidence and investment in Asia. And there could be global growth forecasts downgrades in the next update in January. In particular, he said Japan and South Korea could be among the those hardest hit due to reliance on exports to China.

                  He noted that “Investment is much weaker than expected. My interpretation is that the confidence channel is already affecting the global economy, particularly Asian economies”. And, “we see global growth a little bit slower than we forecast in October.” He also added that “Uncertainty is so large … uncertainty means you have upside potential as well as downside risk. At this moment, we believe the downside risk is a little bit higher.”

                  Regarding China, Rhee said “They aren’t accelerating (stimulus) yet but taking the foot from the brake for the time being. But that doesn’t exclude the possibility that if the trade tension escalates, if growth goes down, they are ready to use stimulus.” But at the same time, IMF is concerned with China’s medium term goals including deleveraging And Rhee urged that “when they actually try to use stimulus, we hope they can use more fiscal policy rather than credit expansion.”

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                  White House: Progress made in candid and construction trade discussions with China

                    In a very short statement, White House noted delegations of the US and China “continued to make progress” on trade negotiations in Beijing this week. And there were “candid and constructive discussions on the negotiations and important next steps”. US “looks forward to the meetings planned with Vice Premier Liu He and the Chinese delegation in Washington next week.”

                    There are no details again on what those progress is and what those important next steps are.

                    Full statement here.

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                    A look at 10-year yield and USD/JPY ahead of NFP

                      US non-farm payrolls will be a major focus today. Markets are expecting US economy to have added 105k jobs in October. Unemployment rate is also expected to edge higher from 3.5% to 3.6%. Average hourly earnings are expected to grew 0.3% mom. Looking some other related data, ADP employment grew 125k, largely in-line with expectations. Four-week moving average of initial jobless claims rose slightly from 212.5k to 214.75k. Conference Board consumer confidence dropped from 126.3 to 125.9, but remained high.

                      US 10-year yields and USD/JPY will be the two to watch for NFP reactions. Both have been under much pressure after FOMC’s rate cut this week, as Jerome Powell didn’t sound firm on ending the so called “mid-cycle adjustment”. 10-year yield has apparently topped out at 1.860, below prior resistance at 1.903. Any downside surprises in the headline figure or wage growth could send TNX further lower towards 1.429 low. That could pave the way for a break through 1.429 later in Q4.

                      USD/JPY was rejected by 109.31 resistance earlier this week. The development argues that rebound from 104.45 was a three wave corrective move that has completed at 109.28. NFP disappointment or weakness in TNX could prompt further selling in USD/JPY to 106.48 support. Break will reaffirm medium term bearishness for a new low below 104.45.

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                      Trump exempted over 50% of steel imports from tariffs, but not Japan nor Taiwan

                        Trump also announced temporary suspension to the steel and aluminum tariffs, until May 1, 2018. The final result will depend on the discussions outcome. The countries that are temporarily exempted include Argentina, Australia, Brazil, Canada, Mexico, EU and South Korea.

                        According to Wood Mackenzie data, in 2017, the top 10 steel importer to US are Canada (16.7%), Brazil (13.2%), South Korea (9.7%), Mexico (9.4%), Russia (8.1%), Turkey (5.6%), Japan (4.9%), Germany (3.7%), Taiwan (3.2%), China (2.9%).

                        The total contribution of the exempted countries is 52.7%!

                        Like some said, this is more political drama than anything as Trump announced a tariff and more than 50% is exempted.

                        Meanwhile, two notable absentees are Japan and Taiwan. Japanese’s request for exemption seemed to have fallen on deaf ears. Both Japan and Taiwan are seen by many as the closest allies of the US in the far east.

                        Here is the statement:

                        President Trump Approves Section 232 Tariff Modifications

                        WASHINGTON – Today, based on ongoing dialogues, President Donald J. Trump authorized the modification of the Section 232 tariffs on steel and aluminum imports to suspend the tariffs for certain countries before they take effect. These suspensions are based on factors including ongoing discussions regarding measures to reduce global excess capacity in steel and aluminum production by addressing its root causes.

                        The tariffs on steel and aluminum imports from the following countries are suspended until May 1, 2018, pending discussions of satisfactory long-term alternative means to address the threatened impairment to U.S. national security:

                        the member countries of the European Union; and
                        South Korea.

                        By May 1, 2018, the President will decide whether to continue to exempt these countries from the tariffs, based on the status of the discussions. The European Union will negotiate on behalf of its member countries.

                        The President retains broad authority to further modify the tariffs, including by removing the suspensions or suspending additional countries. Any country not currently suspended remains welcome to discuss a possible suspension with the United States based on a shared commitment to addressing global excess steel and aluminum capacity and production.

                        The Administration will closely monitor imports of steel and aluminum imports from exempted countries, and the United States Trade Representative, in consultation with the Secretary of Commerce and the Director of the National Economic Council, may advise the President to impose quotas as appropriate. Further action by the President would be needed to implement any quota the President might decide to adopt.

                        The tariffs proclaimed in Presidential Proclamations 9704 and 9705 will go into effect on 12:01 a.m. on Friday, March 23, 2018.

                        The process for directly affected parties to apply for an exclusion for specific steel or aluminum products that they need remains in place, as announced in the two Presidential Proclamations and subsequent Federal Register notices by the U.S. Department of Commerce. Secretary Ross, in consultation with other Administration officials, will evaluate exclusion requests for products, taking into account national security considerations. In that evaluation, the Secretary will consider whether a product is produced in the United States of a satisfactory quality or in a sufficient and reasonably available amount.

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                        UK CPI unchanged at 1.9%, core at 1.8%, Sterling steady

                          In March, UK CPI was unchanged at 1.9% yoy, below expectation of 2.0% yoy. Core CPI was also unchanged at 1.8% yoy, below expectation of 1.9% yoy. RPI slowed to 2.4% yoy, down from 2.5% yoy and miss expectation of 2.6% yoy.

                          PPI input dropped -0.2% mom, rose 3.7% yoy, below expectation of 0.3% mom, 3.9% yoy. PPI output rose 0.3% mom, 2.4% yoy, versus expectation of 0.2% mom, 2.1% yoy. PPI output core rose 0.02% mom, 2.2% yoy versus expectation o f0.1% mom, 2.2% yoy..

                          House price index rose 0.6% yoy in February, well below expectation of 1.3% yoy.

                          EUR/GBP rises mildly today mainly due to Euro’s strength. Sterling’s reaction to the data set elsewhere is muted.

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                          Japan industrial production posted largest contraction in nearly two years

                            Japan industrial production dropped sharply by -4.2% mom in October, missing expectation of -2.1% mom. That’s also the worst decline in nearly two years since January 2018. Output was seen as negatively impacted by temporary shutdowns of factories due to typhoon. Also slowing productions of big-ticket items following sales tax hike also weighed.

                            METI also noted that according to the Survey of Production Forecast in Manufacturing, production is expected to decrease in November and increase in December. Finance Minister Taro Aso said the government would consider more funding or cashless support to secure the economy’s recovery trend.

                            Also from Japan, unemployment rate was unchanged at 2.4% in October, matched expectations. Tokyo CPI core edged up to 0.6% yoy in November, matched expectations.

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                            US Mnuchin on Chinese Yuan, trade and Fed

                              US Treasury Secretary Steve Mnuchin met with China PBoC Governor Yi Gang on the sidelines of the IMF summit in Indonesia. Mnuchin said after the meeting that “I expressed my concern about the weakness in the (yuan) currency and that as part of any trade discussions, currency has to be part of the discussion. And he added that “we had a productive explanation from his standpoint on those issues” regarding Yuan’s depreciation against Dollar. It’s reported that Yi told people in a closed-door session that China’s monetary policy was on an opposite cycle to that of the US.

                              Mnuchin declined to comment on whether China would be named a currency manipulator in the upcoming Treasury report. But he emphasized that “The currency report is something we report to Congress. It is done pursuant to two separate pieces of legislation. This is not a political document.”

                              But on trade, Mnuchin insisted that”It has to be that we can reach an agreement on action items that can rebalance the relationship. We’ve made it clear that if they have real action items that they want to discuss that we will listen.”

                              On Fed, Mnuchin said “The president likes low interest rates. The president is concerned about the Fed raising interest rates too much and slowing down the economy and those are obviously natural concerns.” Meanwhile he called this week’s stock market rout as a ” natural correction after the markets were up a lot”. And according to Mnuchin, it’s not related to high interest rates and Fed policy and “there’s really no new information in the market on the Fed or on trade for that matter.”

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                              Yen rises as Japan’s consumption-led GDP growth beat expectation

                                The Japanese Yen appears to be lifted by stronger than expected GDP data today. Japan economy grew 0.5% qoq, 1.9% annualized in Q2. That’s way stronger than expectation of 0.3% qoq, 1.4% annualized. It’s also a strong rebound from prior quarter’s -0.2% qoq, -0.6% annualized contraction. Q1 was an unexpected interruption in the best run in the economy since 1980s. In Q2, GDP deflator rose 0.1% yoy, also beat expectation of -0.2% yoy fall.

                                Private consumption, which accounts for 60% of the economy, grew an impressive 0.7%. The solid growth could be an indication of finally a changing “social mood” in the country. And people are more willing to spend based on the expectation that wages will eventually rise. Getting out of such “social mood” is important for Japan to beat the persistent trend of sluggish low inflation. Such development should be very welcomed by BoJ Meanwhile, Capital expenditure rose 1.3%, strongest since Q4 2016.

                                Also from Japan, Domestic CGPI rose 3.1% yoy in July versus expectation of 2.9% yoy. Tertiary industry index, however, dropped -0.5% mom in June versus expectation of -0.2% mom.

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                                Fed Mester: Interest rate at lower end of neutral range

                                  Cleveland Fed President Loretta Mester said more rate hikes are still needed if the economy develops as she expected. She tweeted that “If economy performs as I expect, fed funds rate may need to move a bit higher. But if downside risks come to pass and economy is weaker than expected, I will adjust my outlook and policy views.”

                                  However, in a speech “Perspectives on the Economic Outlook and Monetary Policy in the Coming Year”, Mester said interest rate is already “at the lower end” of the longer-run neutral rate. It’s at a level that neither stimulates nor restricts the economy, and recent rate hikes are still working themselves through the economy. In the coming meetings, Fed will also finalize the plan for ending the balance-sheet runoff and completing balance-sheet normalization.

                                  Mester also noted that the economy is a “very good spot”. While growth is slowing from an above-trend pace, labor markets are strong. Inflation is near 2% with no signs of appreciably rising. So, in her view “monetary policy does not appear to be far behind or far ahead of the curve”. And that gives Fed the opportunity to ” gather information on the economy and assess our forecast and the risks, before making any further adjustments in the policy rate.”

                                  Her full speech here.

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                                  US, EU and Japan urged to launch trilateral effort against China’s mercantilist trade practices

                                    The Information Technology & Innovation Foundation called on the US, EU and Japan to “band together in strong trilateral partnership to pressure China into rolling back the mercantilist trade practices it uses to grow advanced, innovation-driven industries”.

                                    In a report released on Monday, the think tank warned “without aggressive, coordinated action, leading economies in Europe, Asia, and North America are likely to face a crushing wave of unfair competition”. Jobs are also threatened in industries as diverse as aerospace, automobiles, biopharmaceuticals, chemicals, electronics, digital media, Internet services, machine tools, semiconductors, and others.

                                    “China has progressed enough economically and technologically that it no longer fears bilateral pressure against its mercantilist trade violations, but it sees collective action as a real deterrent,” said ITIF’s associate director for trade policy, Nigel Cory, who co-authored the report with ITIF President Robert D. Atkinson. “Neither the United States nor the European Union nor Japan can make China change its ways alone, but together, through a stronger trilateral agenda, they can.”

                                    US Trade Representative Robert Lighthizer, Japan Minister of Economy, Trade and Industry Hiroshi Kajiyama and EU Trade Commissioner Phil Hogan are having bilateral and trilateral meetings this week.

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                                    Low expectations on EU-China summit in Brussels this week

                                      Chinese Vice Premier Li Keqiang will meet top EU officials in a summit in Brussels on Tuesday. Ahead of that Li wrote in German newspaper Handelsblatt, saying that China was ready to work closely with the EU on climate change, sustainable development, preserving the Iran nuclear deal and fighting terrorism. But China is only willing to exchange views on WTO reforms.

                                      EU, on the other hand, is said to known to be concerned with the unfair trade practices with this systemic rival. In particular, there is no binding commitments from China in key areas, including inclusion of state subsidies on enterprises as part of WTO reforms. And European Council President Donald Tusk was said as objecting to a joint statement for the summit, as China has not delivered on key EU expectations and demands.

                                      The expectations on the summit are generally low.

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                                      Fed Bullard: No doubt the US economy will slow in 2019 and 2020

                                        St. Louis Fed President James Bullard said “I don’t have any reason to doubt the economy will slow in 2019 and 2020. It would be much tougher for the Fed to continue to raise at this pace in a slowing economy relative to where we have been.”

                                        He also warned that “the good news won’t last forever, and if potential growth really is at 1.8 percent the economy is going to return to some level more like that.” He added, “the question in my mind is what are we trying to control? We have already been preemptive…We took all this action and it has put us in good shape.”

                                        And, “if we had not had these surprises to the upside my story would have looked better in retrospect than it does,” Bullard said. “As a baseline most forecasts have the economy slowing down…That is the basic structure we are working with going into 2019.”

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                                        Gold finally breaks 1214, 1235/6 is the key resistance

                                          Gold finally breaks 1214.30 resistance to resume the rebound from 1160.36, with strong upside momentum. Further rally would now be seen. But at this point, we’re seeing such rally as a correction to the fall from 1365.24 to 1160.36. The key lies in 1235.24/1236.99 cluster resistance zone (38.2% retracement of 1365.24 to 1160.36 at 1238.62, 100% projection of 1160.36 to 1214.30 from 1183.05 at 1236.99). For now we’d expect this resistance to hold to bring down trend resumption.

                                          However, decisive break there will argue that the trend could have reversed and further rally might be seen back to 61.8% retracement at 1286.97 and above.

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