Mon, Jul 22, 2019 @ 14:01 GMT

Today’s top mover: CAD/JPY is a pair to avoid

    At the time of writing, CAD/JPY is the biggest mover today, down -53 pips. But it’s a rather tight race. Yen is generally speaking the stronger one on falling global treasury yields. But no currency is decidedly strong.

    Meanwhile, the outlook of CAD/JPY is rather mixed and, admittedly, hard to determine. There are two scenarios with equal probability to us. Firstly, the corrective fall from 89.22 has completed with three waves down to 84.61. That is CAD/JPY has bottomed at 84.61 already and the next move is up through 86.98 resistance.

    Secondly, such decline is not completed yet. And price actions from 84.84 are merely a sideway corrective pattern that’s skewed to the downside. That is, CAD/JPY should have another decline through 84.61 low.

    We won’t object if our readers found the above view as nonsense. They’re actually quite useless for trading the pair. At this point, to us, CAD/JPY is a pair to avoid.

    But anyway, break of 85.17 minor support will favor the bearish case and turn bias to the downside for 84.61 support first. Break will target 83.75 and below. On the upside, break of 86.25 will favor the bullish case and turn bias to the upside for 96.98 resistance.

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    RBA to consider cutting interest rate at June meeting

      In a speech delivered today, RBA Governor Philip Lowe said the central bank will consider the case for cutting interests in the upcoming meeting in two weeks’ time n June. After weak inflation reading and surge in unemployment rate in Q1, RBA might pull ahead the anticipated rate cut(s) for the second half.

      Lowe said “accumulating evidence is that the Australian economy can support an unemployment rate of below 5 per cent without raising inflation concerns”. Such judgement is also “consistent with the experience overseas”. Meanwhile, recent flow of data suggests it’s “less likely” that “current policy settings are sufficient to deliver lower unemployment.”

      There are few options ahead to lower unemployment rate. These include further monetary easing, additional fiscal support and structure policy changes. But he emphasized “relying on just one type of policy has limitations, so each of these is worth thinking about.”

      Lowe concluded the speech noting: “A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”

      Lowe’s full speech The Economic Outlook and Monetary Policy.

      Some readings on RBA minutes released today too:

      AUD/USD dips notably today but stays above 0.6864 temporary low so far. Nevertheless, with 0.6988 resistance intact, near term outlook remains bearish. Further decline should be seen ahead to 161.8% projection of 0.7295 to 0.7003 from 0.7205 at 0.6733, which is close to 0.6722 low.

       

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      China and EU agreed to oppose unilateralism and trade protectionism

        Chinese Vice Premier met with European Commission Vice President Jyrki Katainen in Beijing today. After the meeting, Liu said in a media briefing that “both sides believe that we must resolutely oppose unilateralism and trade protectionism and prevent such behavior from causing volatility and recession in the global economy.” Additionally, both sides will prepare lists of proposals for bilateral investment agreement at another China-EU summit next month.

        Katainen, on the other hand, emphasized there some areas must be addressed to take the economic, trade and investment relationship further. For example, he said “it is essential that we work together to tackle overcapacity in sectors such as steel and aluminum.” And he urged China to avoid overcapacity in other sectors too, including those targeted by the “Made in China 2025” initiative.

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        EU Moscovici urges a gateway out of spiral of trade tension escalation

          European Commissioner for Economic and Financial Affairs Pierre Moscovici warned in a newspaper interview that trade tension between the US and EU would hit the financial markets. He said “an escalation – no matter from which side – would have serious consequences for the economy, including for the financial markets, which would hurt all sides.”

          He urged “that’s why we need a gateway to get out of this spiral that ultimately damages the global economy and pulls everyone down with it.”

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          China offered to cut surplus to US by USD 50b??

            Bloomberg reported citing a “person familiar with the situation” regarding US-China trade tension. That “person” said China Vice Premier Liu He rejected US request to stop subsidizing business related to its “Made in China 2025” initiative.

            Request from the US came after China offered to lower it’s trade surplus to US by USD 50b. And that would be done by China buy more liquefied natural gas, agricultural products, semiconductors and luxury goods from the US. China’s proposal also include opening the financial sector at a faster pace, giving US companies more access to the e-commerce markets.

            In addition, that “person” said Liu said that President Xi Jinping is ready to fight back in Trump wants a trade war. And China is open to talks but won’t initiate it.

            Our views

            It’s yet another Bloomberg report with information from a “person”. Bloomberg didn’t even specify that it’s from a Chinese government official. So, there is no way for us to judge whether is information is indeed from the US or from China. Even so, is it something that leaked, or made up, from Trump’s own team?

            For now, we don’t believe that China has offered to cut the surplus to US by USD 50b. There is no urgency for China to offer anything. It takes from now to May 22 for Trump to collect public input on the tariffs on that USD 50b. What will the end-list be? It’s a big unknown, not to mention that list of USD 100b of goods. Even if China would offer something eventually, would Xi want to drag the negotiation beyond the mid-term election in the US?

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            US PPI slowed to 1.7% yoy, core PPI unchanged 2.3% yoy

              US PPI rose 0.1%, 1.7% yoy in June, versus expectation of 0.1% mom, 1.6% yoy. PPI core rose 0.3% mom, 2.3% yoy, versus expectation of 0.2% mom, 2.1% yoy.

              Full release here.

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              DOW staged 700 pts comeback as trade war cards digested

                DOW’s initial dive to 23523.16 overnight proved to be temporary and the rebound from there extended without looking back. DOW ended the day up 230.94 pts or 0.96% at 24264.30. That’s a massive 700 pt come back and was the strongest in nearly two months.

                23360.29 is proving to be a solid support that help fuel the rebound. Also, the cards of the first battle of US-China trade war are now unveiled. At this stage, they’re words only as no implementation dates were given by neither side. US will have to wait until completion of the period of public input on May 22 before finalizing the section 301 tariff list. And China certainly won’t have any further action before the US starts the next move. So between now and May 22, we should have already seen the worst. Beyond that? Who knows?

                For now, a base should be established at 23344.52/23360.29. And the question is how far the rebound would go. 24314.30 resistance should be taken out easily and the first real hurdle is on trend line resistance at around 24900. The next key hurdle is in 25449.15/25800.25 zone. While a breach of the first one could be seen, we don’t anticipate a break of the second.

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                ECB policy contributed considerably to private consumption growth

                  ECB released a bulletin article “Private consumption and its drivers in the current economic expansion” today. It argues that private consumption has been a main driver of growth in the current cycle that started back in 2013. And this has been “largely driven by the recovery in the labour market”. And, as labor markets continue to improve, ” consumer confidence should remain elevated and private consumption should rise further”

                  At the same time, the article said that ECB’s accommodative monetary policy has “contributed considerably to the expansion of private consumption”. At the same time, the policies have also “directly decreased income and wealth inequality”. There is little evidence that low interest rates have led to generalized increases in household indebtedness. And therefore, the overall economic expansion is “sustainable”.

                  Full article here.

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                  IMF: Shift from high-speed to high-quality growth in China key for decades to come

                    IMF said in a report that China’s economy continues to “perform strongly”, with growth projected at 6.6% this year. But it also warned that the country is at a “historic juncture”. The shift from “high-speed” to “high-quality” growth will determine China’s “development path for decades to come”. Risk of “near-term abrupt adjustment” was reduced by recent strong growth momentum and “significant financial de-risking progress”. While there were accelerated rebalancing in some dimensions, “progress slowed” in many other dimensions. Also, while credit growth has slowed, “it remains excessive.

                    In the latest projections, IMF projected China GDP growth to be at 6.6% in 2018, slow to 6.4% in 2019, 6.3% in 2020, 6.0% in 2021, 5.7% in 2022 and 5.5% in 2023. Current account surplus as to GDP is projected to be at 0.9% in 2019, to close to 0.8% in 2019, at 0.8% in 2020, then slow to 0.7% in 2021, 0.5% in 2022 and 0.4% in 2023.

                    IMF also summarized the report in six charts.

                    1. China’s strong GDP growth continues. The country now accounts for one-third of global growth. Over 800 million people have been lifted out of poverty and the country has achieved upper middle-income status. China’s per capita GDP continues to converge to that of the United States, albeit at a more moderate pace in the last few years.

                    2. A focus on high-quality growth. China is at an historic juncture. After decades of high-speed growth, the government is now focusing on high-quality growth. The authorities will need to build on the existing reform agenda and take advantage of the current growth momentum to “fix the roof while the sun is shining.” Key elements are: continuing to rein in credit growth, accelerating rebalancing efforts, increasing the role of market forces, fostering openness, and modernizing policy frameworks. Even with a gradual slowdown in growth, China could become the world’s largest economy by 2030.

                    3. Credit growth has slowed but remains too fast. Despite the sharp rebound in nominal GDP and industrial profits, total nonfinancial sector debt still rose significantly faster than nominal GDP growth in 2017. While the corporate debt to GDP ratio has stabilized, government and especially household debt is rising, driven by continued strong off-budget investment spending and a rapid increase in mortgage and consumer loans. It may take determined actions over an extended period of time to address underlying vulnerabilities.

                    4. China, a global digital leader. China has around 700 million internet users and 282 million digital natives (internet users less than 25 years old) eager to adopt new technology. The massive scale of the Chinese market and a supportive regulatory and supervisory environment in the early years of digitalization made China a global leader in frontier industries such as e-commerce and fintech. Digitalization will continue to reshape the Chinese economy by improving efficiency, softening—but not reversing—slowing growth as the economy matures.

                    5. Rebalancing efforts should be accelerated. Increases in health, education, and social transfers—financed by taxes on income, property and carbon emissions—would support consumption, and reduce income inequality and pollution. A more comprehensive approach to structural reforms, such as increasing transfers to the regions most affected by overcapacity reduction or pollution control, could help address the tensions across rebalancing dimensions.

                    6. The benefits of faster reform. In the baseline, real GDP growth is projected at 6.6 in 2018, reflecting the lagged effect of regulatory tightening and softer external demand. Risks are tilted to the downside, with tightening global financial market conditions and rising trade tensions. If the authorities move more decisively to resolve the policy tensions now and focus on higher-quality growth and a greater role for the market, near-term growth would be weaker but longer-term growth would be stronger and more sustainable. An illustrative “proactive” scenario features faster reform progress, particularly state-owned enterprises (SOE) reform and resolving zombie firms, which also accelerates rebalancing from investment to consumption. If there is a risk of a too sharp slowdown, a temporary fiscal stimulus package with resources to support rebalancing could help cushion the near-term adverse impact.

                    Link to the press release.

                    Link to the full Article IV consultation report

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                    China trade surplus shrank again as exports contracted in April

                      China’s trade surplus shrank again in April to USD 13.84B, down from USD 32.67B and missed expectation of USD 34.56B. Exports dropped -2.7% yoy versus expectation of 3.0% yoy. On the other hand, imports rose 10.3% yoy versus expectation of -3.0% yoy.

                      In CNY terms, trade surplus narrowed sharply to CNY 93.57B, down from 221.23B, missed expectation of CNY 216.75B. Exports grew merely 3.1% yoy versus expectation of 8.0% yoy. Imports rose 10.3% yoy versus expectation of 3.0% yoy.

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                      Most economists expect RBA to stand pat in August

                        According to a Reuters’ poll, 39 of 40 surveyed economists surveyed over the past week expect RBA to keep interest rate unchanged at 1.00% at the August 6 meeting.

                        By the end of the year, 13 of 40 expect RBA to be on hold through this year. 25 expect another rate cut to 0.75% by year-end. Only two banks, Standard Chartered and Goldman Sachs, predict two cuts to 0.50%.

                        RBA delivered two back-to-back cuts in June and July to 1.00%. The central bank’s research indicates such rate cut would boost GDP growth by 0.25-0.40% over two years. However, inflation would be lifted by 0.1% only.

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                        IMF sees Eurozone facing prolonged period of anemic growth and inflation

                          IMF forecasts Eurozone growth to slow to 1.3% in 2019, then rebound to 1.6% in 2020. Inflation is forecast to be at 1.3% in 201 and remain far off ECB’s 2% target at least until 2022. it urged that ECB’s monetary policy stimulus was “vital” as Eurozone was facing “a prolonged period of anemic growth and inflation”. And, “the undershooting of the inflation objective calls for prolonged monetary accommodation.”

                          IMF expected more monetary easing could be necessary if inflation expectations worsen. However, it also raised doubt on the idea of tiered deposit rate in case of more monetary easing. It said “a regime of tiering… would have a very small impact on aggregate bank profitability and a questionable impact on credit conditions.”

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                          Trump: Not the right time for trade talk with China

                            There is breakthrough in US-Mexico trade talk, which will likely pave the way for Canada. There is progress in US-EU trade talks too. But how about China? Trump is clear with his priority as he said yesterday that “it’s just not the right time to talk right now, to be honest with China.” He went further and added that “it’s too one-sided for too many years and too many decades, and so it’s not the right time to talk.” Though, he said “eventually I’m sure that we’ll be able to work out a deal with China.” US Trade Representative Robert Lighthizer said that “we have to change the way we work with China”, without giving any detail.

                            This could explain why all Asian stocks surge today but China SSE is left behind. Yuan was lifted since the PBoC reintroduced measures last Friday that acts counter-cyclical to market forces to keep Yuan from falling too quickly. But the Yuan is quickly losing some momentum already.

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                            German Ifo business climate dropped to 114.7 as threat of protectionism dampended mood in the economy

                              German Ifo business climate dropped to 114.7 in March, down from 115.4, slightly above expectation of 114.6.

                              Ifo expectation dropped to 104.4, down from 105.4, met consensus.

                              Ifo current assesment dropped to 125.9, down from 126.3, above expectation of 125.6.

                              Ifo economist Klaus Wohlrabe “the protectionism debate is leaving its mark.” And therefore, “export expectations have fallen to their lowest levels in more than a year.”

                              Ifo president Clemens Fuest also echoed that “the threat of protectionism is dampening the mood in the German economy,”

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                              UK PMI construction rose to 53.1, marks three months of sustained recovery

                                UK PMI construction rose to 53.1 in June, up from 52.5 and beat expectation of 52.0. Markit noted in the release that house building remains best performing area of activity. Also, new orders rise at fastest pace since May 2017 and input cost inflation accelerates in the month.

                                Tim Moore, Associate Director at IHS Markit and author of the IHS Markit/CIPS Construction PMI® :

                                “The latest increase in UK construction output marks three months of sustained recovery from the snow-related disruption seen back in March. A solid contribution from house building helped to drive up overall construction activity in June, while a lack of new work to replace completed civil engineering projects continued to hold back growth.

                                “Of the three main categories of construction work, commercial building was sandwiched in the middle of the performance table during June. Survey respondents suggested that improved opportunities for industrial and distribution work were the main bright spots, which helped to offset some of the slowdown in retail and office development.

                                “Stretched supply chains and stronger input buying resulted in longer delivery times for construction materials during June. At the same time, higher transportation costs and rising prices for steel-related inputs led to the fastest increase in cost burdens across the construction sector since September 2017.”

                                Full UK PMI construction release.

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                                European Update: Sterling pares gain as Brexit optimism turns into cautiousness

                                  Sterling reversed some of this week’s gain as Brexit optimism has now turned into cautiousness. UK Prime Minister Theresa May will hold a Cabinet meeting shortly to secure support for her agreement with the EU. And she plan to issue Commons statement after that. EU’s chief negotiator Michel Barnier also plans to make a statement today on the status, and hopefully, he would declare “decisive progress” for a November EU summit. The could be some more volatility in the pound in the upcoming hours.

                                  For now, New Zealand Dollar remains the strongest one for today, followed by Canadian Dollar and then US Dollar. WTI crude oil dipped to as low as 54.84 but it’s now back above 56. The recovery is giving Canadian a breath but that could be temporary. Meanwhile, Swiss Franc is trading as the weakest one, followed by Australian Dollar and then Sterling.

                                  Economic data released today saw US CPI and core CPI stalled at 2.4% yoy and 1.9% yoy respectively. German GDP and Japan GDP contracted in Q3 and both were attributed to global trade tensions. US CPI will be the next focus.

                                  In European markets, major indices are trading mildly softer today. At the time of writing:

                                  • FTSE is down -0.02%
                                  • DAX is down -0.34%
                                  • CAC is down -0.42%
                                  • German 10 year yield drops -0.018 to 0.396
                                  • Italian 10 year yield is up 0.043 at 3.490. German-Italian spread is now at 310. That came after Italy refused to change its 2019 deficit target in the resubmitted plan to EU.

                                  Earlier in Asia

                                  • Nikkei closed up 0.16%
                                  • But Hong Kong HSI dropped -0.54%
                                  • China Shanghai SSE dropped -0.85%
                                  • Singapore Strait Times dropped -0.34%
                                  • Japan 10 year JGB yield dropped -0.0077 to 0.108. We haven’t seen it below 0.11 for a while.
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                                  German GfK consumer confidence dropped to 10.1, downward spiral of economic outlook continued

                                    Germany GfK consumer confidence for June dropped to 10.1, down from 10.2 and missed expectation of 10.4. That’s also the lowest level in more than two years. GfK noted that following a period of stability, the consumer climate was forced to take a small hit once more.

                                    In particular, the steep downward spiral of the economic outlook has continued. The indicator dropped -1.3 to 1.7. It lost almost 32 points within just a 12-month period. GfK added, “The global cooling off of the economy, the endless discussions around Brexit, and the risk of an escalation of the trade conflict with the USA have also put a noticeable brake on the economic outlook of consumers. Persistent trade conflicts pose a particular threat to the export nation of Germany. Weak periods of economic activity have a similar effect on export markets.”

                                    Full release here.

                                    Also from Germany, import price rose 0.3% mom in April, below expectation of 0.5% mom.

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                                    German Ifo dropped to 102.8, global uncertainty increasingly taking its toll

                                      German Ifo business climate dropped to 102.8 in October, down from 103.7, below expectation of 103.2. Current assessment gauge dropped to 105.9, down from 106.4 and missed expectation of 106.0. Expectations gauge dropped to 99.8, down from 101 and missed consensus of 100.3. Manufacturing, services and trade indices record decline in the month, but construction hit another record high.

                                      Ifo president Clemens Fuest noted in the release that “firms were less satisfied with their current business situation and less optimistic about the months ahead. Growing global uncertainty is increasingly taking its toll on the German economy.”

                                      Full release here.

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                                      UK retail sales flat versus expectation of -0.4% mom

                                        UK April retail sales data came in better than expected:

                                        • Retail sales include auto & fuel rose 0.0% mom versus expectation of -0.4% mom.
                                        • Retail sales include auto & fuel rose 5.2% yoy versus expectation of 4.5% yoy.
                                        • Retail sales exclude auto & fuel dropped -0.2% mom versus expectation of -0.5% mom.
                                        • Retail sales exclude auto & fuel rose 4.9% yoy versus expectation of 4.3% yoy.

                                        The details, though, are not too impressive and fuel stores and non-store retailing were the only positive contributors to the quantity bought in April.

                                        Full release here.

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                                        Asian markets higher, yen low as Trump boasts big progress in US-China trade talks

                                          Asian stocks are apparently lifted by Trump’s tweet on the “big progress” in trade talks with China. Hong Kong HSI is up 1.27% at the time of writing. Singapore Strait Times is up 0.44%. Japan and China are on holiday though. But at the time time, gain is limited partly due to holiday, and partly on mixed China PMI data. In the currency markets, Yen is the weakest one for today so far while commodity currencies trade higher. but most are trading within Friday’s range.

                                          Trump tweeted over the weekend that “Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!”. China’s state media also said Xi believed both sides wanted “stable progress”, and China-US ties had reached a “vital stage” on its 40th anniversary.

                                          It’s reported that US delegation, led by Deputy U.S. Trade Representative Jeffrey Gerrish with Treasury Under Secretary for International Affairs David Malpass, will travel to China in the week of January 7 for face-to-face meeting.

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