Tue, Jul 14, 2020 @ 09:41 GMT

NIESR: UK to lose a quarter of GDP in Q2, but appeared to have bottomed out

    NIESR said the UK is set to lose a quarter of output in Q2. It expected GDP to decline by-20% to -25% in Q2, a “significantly steeper decline than the first quarter, reflecting the full impact of lockdown measures.

    “As we have suggested, around a quarter of GDP is lost when the lockdown is fully in place. The latest ONS estimate represents a record monthly decline for UK GDP, with all sectors experiencing record falls. However, the economy now appears to have bottomed out, as recent survey evidence suggests an easing in the rate of contraction in the manufacturing and services sector. The re-opening of non-essential stores from 15 June, coupled with the government’s continued support should aid a gradual, albeit limited, recovery in domestic activity.” Dr Kemar Whyte Senior Economist – Macroeconomic Modelling and Forecasting

    Full release here.

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    Into US session: Aussie stays firm despite risk aversion, stocks weighed down by Huawei isolation

      Entering into US session, European stocks are trading broadly lower while US futures also point to lower open. Sentiments are hurt as US is stepping up measures to isolate China’s telecom giant Huawei as trade war intensifies. Chipmakers including Intel, Qualcomm, Broadcom indicated that they will stop supply to Huawei. Germany’s Infineon Technologies is also reported to have halted shipments to the Chinese company. But most importantly, Google will also cut up supply of hardware and some software services.

      However, the reactions in currency markets are relatively muted. Australian Dollar remains the strongest one, as boosted by election results over the weekend. New Zealand and Canadian Dollars follow. There is no apparent lift on Yen and Swiss Franc despite risk aversion. On the other hand, Dollar, Euro and Yen are the weakest ones for now.

      In Europe, currently:

      • FTSE is down -0.96%.
      • DAX is down -1.50%.
      • CAC is down -1.61%.
      • German 10-year yield is up 0.0105 at -0.091.

      Earlier in Asia:

      • Nikkei rose 0.24%.
      • Hong Kong HSI dropped -0.57%.
      • China Shanghai SSE dropped -0.41%.
      • Singapore Strait Times dropped -0.77%.
      • Japan 10-year JGB yield rose 0.008 to -0.047.
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      USD strongest followed by CHF, JPY weakest into US session

        USD’s rally extends today and is trading firm entering into US session. Technically, both GBP/USD and AUD/USD have taken out recent support at 1.3965 and 0.7642 respectively, suggesting more upside in USD in near term.

        Looking at D heatmap, we can see that JPY is the weakest one for the day while CHF is the second strongest one. This may look a bit counter intuitive. But it makes sense after giving a bit deeper thoughts.

        Firstly, EUR/CHF is finding it difficult to break through 1.2 historical level. It’s being rejected from there after last week’s attempt and is back at 1.1930 at the time of writing. That helps lift CHF elsewhere.

        Secondly, European’s stocks are fluctuating between gains and losses today, suggesting that’s is no underlying strong risk appetite yet. Thus, at least, there is no additional selling pressure on the CHF.

        Thirdly, surging US treasury yield is a key underlying theme in the markets. That’s a main force in boosting USD up. Weakness in the Yen, at the time when US stocks fall (risk aversion), is indeed affirming that yield is the factor.

        Going forward, 108.12/48 resistance zone in USD/JPY is the main focus, which would determine if bullish reversal has already occurred. And, EUR/USD could be testing 1.2214 if the pull back in EUR/CHF gains momentum.

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        BoJ Kuroda: Global economy relatively bright next year

          BoJ Governor Haruhiko Kuroda said together that the “overall global economy is expected to be relatively bright next year”. He noted that economies in US and China are firm. Global economy will also pick up. Additionally, BoJ would need to pay close attention to climate change.

          Meanwhile, Kuroda also said BoJ stands ready to step up stimulus if needed. But it’s also mindful of rising costs of prolonged easing. He urged financial institutions to diversify operations, cut costs and consider consolidating businesses.

          BoJ said “the domestic and external environment surrounding financial institutions is changing rapidly. The industry is entering an age of reform aimed at rebuilding its business model into a more sustainable one”.

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          ECB Draghi: Euro’s international role in foreign reserves and debt market eroding

            ECB President Mario Draghi appears in the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament today. Regarding Euro’s internal dimension, Draghi said “euro has indeed provided two decades of price stability”. And, thanks to the “collective efforts of all European citizens, the euro area has emerged from” the global financial crisis, with “22 consecutive quarters of economic growth, the unemployment rate at its lowest level since October 2008, and wages and incomes on the rise.”

            But Draghi also repeated last week’s cautious comments. He noted “over the past few months, incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment.” He reiterated that “significant monetary policy stimulus remains essential”, and “the Governing Council stands ready to adjust all of its instruments”.

            On Euro’s external dimension, Draghi said since the global financial crisis, “the euro’s international role seems to have gradually eroded. While its importance as the currency of invoice for international trade transactions has remained broadly stable, its role in global foreign reserves and global debt markets has declined.” And he urged that “the international role of the euro is supported by the pursuit of sound economic policies in the euro area and a deeper and more complete EMU. And this requires further efforts along the path of deeper integration.”

            Draghi’s full speech here.

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            Bundesbank Wedimann, growth to fall well short of 1.5% potential this year

              Bundesbank President Jens Weidmann said today that German economy growth will “fall well short of the potential rate of 1.5 percent in 2019”. That’s because “there is much to suggest that the dip in growth here in Germany has persisted into the current year”.

              However, he emphasized that the prerequisites for growth remain intact, including low financing cost, expansion in employment market and rising wages. Thus, there is no reason for pessimism yet.

              Separately, it’s reported that German cabinet gave green-light for a second eight-year term for Weidmann, as the current term expires at the end of APril.

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              Trump: Working with China on a complete deal, leave nothing unresolved

                Trump sounds optimistic again in a serious of tweets regarding trade talk with China. He said the meetings in Washington are “going well with good intent on both sides”. Trump is expected to meet with China’s representatives, including Vice Premier Liu He, in the Oval Office today”.

                But he also emphasized that “no final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long standing and more difficult points.” He noted that both sides are trying to do a “complete deal, leaving NOTHING unresolved on the table”.

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                Mexican Guajardo to engage strongly in July on NAFTA

                  Mexican Economy Minister Ildefonso Guajardo said Mexico, Canada and the US will be “engaging strongly” later in July to work on a NAFTA agreement that ‘s “feasible, workable and benefits the three nations involved.”

                  He added that “the only way we will find that solution is if countries involved have sufficient flexibility to be able to find that narrow strip where we have to land.”

                  And he warned that “an agreement that does not give us certainty, does not give us rules that have to be obeyed and mechanisms to settle disputes will not be of help for the business community.”

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                  WTI crude oil resumes down trend, heading to 46.54 fibonacci level

                    WTI crude oil’s down trend from 77.06 resumed this week and drops to as low as 48.09 so far today. Such decline is seen as at least correcting the long term rise from 27.69 (2016 low). Thus, further fall should be seen to 61.8% retracement of 27.69 to 77.06 (2018 high) at 46.54.

                    We’d look at the reaction from 46.54, as well as the structure of the subsequent rebound to decide whether fall from 77.06 is an impulsive or corrective move. But in any case, break of 54.61 resistance is needed to be the first sign of near term reversal. Otherwise, outlook will remain bearish even in case of strong recovery.

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                    US GDP grew 1.9% annualized in Q3, above expectation of 1.6%

                      US GDP grew 1.9% annualized rate in Q3, just slightly down from Q2’s 2.0%, and beat expectation of 1.6%. Headline PCE slowed to 1.5% qoq, down form 2.4% qoq, and missed expectation of 2.0% qoq. But Core PCE accelerated to 2.2% qoq, up from 1.9% qoq, and beat expectation of 2.1% qoq.

                      Looking at some details, GDP growth reflected positive contributions from personal consumption expenditures (PCE), federal government spending, residential fixed investment, state and local government spending, and exports. The were partly offset by negative contribution from nonresidential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased .

                      Full release here.

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                      US NFP grew 224k in June, dollar jumps sharply

                        US non-farm payroll report showed 224k growth in the job market in June, notably above expectation of 164k. Prior month’s dismal figure was revised slightly down from 75k to 72k. Unemployment rate rose 0.1% to 3.7%, above expectation of 3.6%. Participation rate rose 0.1% to 62.9%. Average hourly earnings rose 0.2% mom, below expectation of 0.3% mom. But prior month’s wage growth was revised up from 0.2% mom to 0.3% mom.

                        Employment growth has averaged 172,000 per month thus far this year, compared with an average monthly gain of 223,000 in 2018. In June, notable job gains occurred in professional and business services, in health care, and in transportation and warehousing.

                        Full release here.

                        Dollar jumps sharply after the release. In particular, GBP/USD is heading to retest 1.2506 support.

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                        UK Johnson facing resignation warnings from ministers over no-deal Brexit

                          In UK, the Times newspaper reported that a “very large number” of ministers threatened to quit if Prime Minister Boris Johnson is leading the country to a no-deal Brexit. The resignation watch list include Culture Secretary Nicky Morgan, British Minister for Northern Ireland Julian Smith, Justice Secretary Robert Buckland, Health Minister Matt Hancock and Attorney General Geoffrey Cox.

                          Separately, Financial Times said there were at least 50 MPS that will revolve against a general election manifesto pledging to pursue a no-deal Brexit.

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                          ERG Rees-Mogg’s letter to request no-confidence vote on PM May

                            Chair of the European Research Group (ERG), Jacob Rees-Mogg, released his letter to Sir Graham Brady, chair of the 1922 Committee, requesting a no confidence vote in Prime Minister Theresa May.

                            Full text of the letter:

                            A few weeks ago, in a conversation with the chief whip I expressed my concern that the prime minister, Mrs. Theresa May, was losing the confidence of Conservative members of parliament and that it would be in the interest of the party and the country if she were to stand aside. I have wanted to avoid the disagreeable nature of a formal vote of no confidence with all the ill will that this risks engendering.

                            Regrettably, the draft withdrawal agreement presented to parliament today has turned out to be worse than anticipated and fails to meet the promises given to the nation by the prime minister, either on her own account or on behalf of us all in the Conservative party manifesto.

                            That the Conservative and Unionist party is proposing a protocol which would create a different regulatory environment for an integral part of our country stands in contradistinction to our long-held principles. It is in opposition to the prime minister’s clear statements that this was something that no prime minister would ever do and raises questions in relation to Scotland that are open to exploitation by the Scottish National Party.

                            The 2017 election manifesto said that the United Kingdom would leave the customs union. It did not qualify this statement by saying that we could stay in it via a backstop while annex 2, Article 3 explicitly says that we would have no authority to set our own tariffs. It is also harder to leave this backstop than it is to leave the EU, there is no provision equivalent to article 50 of the Lisbon treaty.

                            The prime minister also promised an implementation period which was the reason for paying £39bn. As was made clear by a House of Lords report in March 2017 there is no legal obligation to pay anything. This has now become an extended period of negotiation which is a different matter.

                            The situation as regards the European court of justice appears to have wandered from the clear statement that we are taking back control of our laws. Article 174 makes this clear as does article 89 in conjunction with article 4.

                            It is of considerable importance that politicians stick to their commitments or do not make such commitments in the first place. Regrettably, this is not the situation, therefore, in accordance with the relevant rules and procedures of the Conservative party and the 1922 committee this is a formal letter of no confidence in the leader of the party, the Rt. Hon. Theresa May.

                            I am copying this letter to the prime minister and the chief whip and although I understand that it is possible for the correspondence to remain confidential I shall be making it public.

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                            BoE Haldane: A big chunk, if not all of uncertainty dissipated since last year

                              BoE Chief Economist Andy Haldane said a “big chunk, if not all” of uncertainty regarding domestic politics and Brexit had dissipated since the end of 2019. “Some early stage signs in surveys suggest there could be a stirring in the undergrowth when it comes to company investment plans”. Nevertheless, it’s “too early to declare victory,”

                              Haldane added that the global economy has grown stronger since the financial crisis more than a decade ago. BoE’s balance sheets are in better shape are in better shape too. He doesn’t see the buildup of new asset bubbles. Nor does he see a “wholesale retrenchment” of globalization even with US China trade war.

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                              BoE Haldane: Will economy bounce back immediately? That’s an open question

                                BoE Chief Economist Andy Haldane said today that March contraction in the economy was probably enough to cause an overall GDP contraction in Q1. Further, Q2 is likely to bring a “very sharp contraction” too.

                                He said that there are “real limits” to what public policy could do to offset the economic impacts from coronavirus containment. “Even after those policies are relaxed, there is certainly a chance that people might be reluctant themselves to want to spend too vigorously, or to go out and socialise too much,” he added.

                                Haldane noted, “there will certainly be some recovery, there will certainly be a bounce. Will it bounce back immediately…? That is an open question.”

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                                Swiss KOF dropped to 53.2, manufacturing continues to have strongest negative impact

                                  Swiss KOF Economic Barometer dropped to 53.2 in May, down from 59.7, missed expectation of 70.2. The reading has halved now since the beginning of the year. KOF said that as in April, “the manufacturing sector continues to have the strongest negative impact. Indicators relating to foreign demand also have a clearly negative impact on the barometer.” By contrast, “private consumption and the construction industry are sending slightly improved signals.”

                                  Full release here.

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                                  Position trading: EUR/JPY short met target, and some reflections

                                    Here is a quick update to our EUR/JPY short trade (sold at 127.80, stop at 127.10, target at 120.00) as last updated here. The target of 120.00 was met as EUR/JPY spiked to 118.62 during the “Currency Flash Crash” in Asian session. We’ve exited with 780 pips profit.

                                    Admittedly, there’s luck, quite a lot of, as the downward move today is rather exaggerated. But technically, the ideal case did happen as there was downside acceleration through 124.08 key support level. The bearish case played out well and it’s just a matter of time when the mentioned 61.8% retracement of 109.03 to 137.49 at 119.90 is met. For now, we’ll hold our hands off first as there will be heavy weight non-farm payrolls to be released tomorrow. We’ll post new strategy, if there would be any good one(s), in the upcoming weekly report.

                                    Meanwhile, there are some reflections on the trade and related ideas we’ve posted in 2018:

                                    • The strategy was first posted back on November 24 here. Back then, AUD/JPY was a better candidate for selling. But due to the uncertainty of Trump-Xi summit, we chose EUR/JPY over AUD/JPY. Looking back, AUD/JPY is still a much better choice, if not for that uncertainty.
                                    • It took more than five weeks for the trade to play out and it’s rather boring in between. But patience usually pays.
                                    • We’re using the relatively “longer” time frame as a way to demonstrate the strategy and analysis in “slow motion”. Thus, we’ve got time to explain our thinking process throughout. Yet the trade was live. And we hope our readers could get something out of the updates.
                                    • With 780 pips profit pocked at the start of 2019, we now have some bullets to probe other opportunities.
                                    • But finally, we’d emphasize that the strategies won’t suit everybody. Traders are advised to choose strategies that suit their temperament.
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                                    US Mnuchin: We’re very focused on the EU trade relationship

                                      US Treasury Secretary Steven Mnuchin said the US is “very focused on the EU” on strengthening the trade relationship. He said that after Meeting of Trump and Juncker, there is an agreement in principal and the officials planned to move forward to “turn it into real agreement”.

                                      Both sides would immediately focus on steel and aluminum tariffs first “so that there can be no tariffs in either direction”. The issue is expected to be resolved “very quickly”. Mnuchin also said there is an outline already, “in agriculture, in chemicals, in medical devices, in industrial LNG” and so “we’re going to make a lot of progress.

                                      Regarding China, Mnuchin said “if they’re willing to make serious changes just as the EU did yesterday, we’ll negotiate with China any time.”

                                      And on NAFTA, he said “hopeful that we’ll have an agreement in principal in the near future.” He also noted that “whether it’s one deal or two deals, so long as we get the right agreement, we’re indifferent.”

                                      US Trade Representative Robert Lighthizer said that the US was close to reaching a broad agreement on NAFTA renegotiations. And he added that “we are in the finishing stages of achieving an agreement in principle that will benefit American workers, farmers, ranchers, and businesses.” And talks were being done at an “unprecedented speed”.

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                                      Japan Aso: US-China relation developing into not just trade war

                                        Japan Finance Minister Taro Aso warned on Yen’s recent gains today and emphasized importance of exchange rate stability. He spoke as Yen surges through key levels on risk aversion, after Trump announced new tariffs on China. Aso said Yen’s fluctuation “will have various impacts”. And “at least, current stability is extremely important. We need to pay close attention to the markets”.

                                        On Trump’s new tariffs on China, Aso said “this will surely affect China’s economy, which I think will have various impacts on the global economy”. And, “there’s already a movie among companies to shift factories out of China. It’s developing into not just trade war but various other things, so it warrants careful attention.”

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                                        AUD/JPY breaks 80.48 key support, resuming medium term down trend for 79.22 next.

                                          AUD/JPY’s strong break of 80.48 key support today its worth a mention. This marks resumption of down trend form 90.29 (2017 high). AUD/JPY should now head to 61.8% retracement of 72.39 to 90.29 at 79.22 next.

                                          In the bigger picture, rejection from 55 week EMA affirmed the bearish case that corrective rise from 72.39 (2016 low) has completed at 90.29. Fall from 90.29 should at least be at the same degree as the rise from 72.39 to 90.29. That is, fall from sustained break of 79.22 should pave the way to retest 72.39 low.

                                          In between, AUD/JPY will face an import fibonacci level of 100% projection of 90.29 to 80.48 from 83.92 at 74.11. Firm break there will suggests that fall from 90.29 is likely an impulsive move. And that will increase the chance of resuming the down trend from 105.42 (2013 high) through 72.39.

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