Fri, Aug 23, 2019 @ 16:31 GMT

Today’s top mover: Failed double bottom in AUD/JPY? 81.24 a key level to watch

    At the time of writing, AUD/JPY is the top mover for today. But it’s actually a very tight race. Rightfully, in a day when risk aversion dominates, AUD/JPY’s weakness is natural.

    To put it into perspective, DOW hit as low as 24421.05 in initial trading. After a weak recovery, it’s down -1.92% at 24539. It looks like DOW could have a take on 24000 handle before the week ends.

    AUD/JPY’s failure to sustain above 38.2% retracement of 90.29 to 78.65 at 83.02 raises serious doubt over the bullish scenario as discussed in a prior post here. If AUD/JPY has completed a double bottom reversal pattern (78.67, 78.56), the move after taking out 82.50 should be powerful. That’s not what we’ve seen. And, focus is now back on 81.24 minor support. Break should confirm the rejection by 83.02 fibonacci level. Also, that would mark rejection by 55 week EMA. And, medium term bearishness would be retained and retest of 78.56 low should be seen next.

    However, if AUD/JPY can defend 81.24 minor support. Firm break of 83.02 should confirm medium term reversal. Further rise should at least be seen to 61.8% retracement of 90.29 to 78.65 at 85.79. We’ll see how it goes within a day or two, or even within hours.

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    China Dec trade balance: Massive -35.8% yoy fall in US imports; exports and imports contracted most since 2016

      China posted a set of very disappointing trade data today. Exports and imports posted biggest contraction since 2016. More importantly, imports from the US dropped a massive -35.8% yoy in the month. But for the year, trade surplus with the US hit a record high.

      In USD terms in December,

      • Trade surplus widened to USD 57.1B, above expectation of USD 51.6B.
      • However, exports dropped -4.4% yoy to USD 221.3B.
      • Imports dropped -7.6% yoy to USD 164.2B.
      • Both imports and exports suffered the steepest decline since 2016.

      Staying in December,

      • With the US, export dropped -3.5% yoy to USD 40.3B, imports dropped a massive -35.8% yoy to USD 10.4B.
      • With EU, exports dropped -0.3% yoy to USD 37.6B, imports dropped -2.7% yoy to USD 22.5B.
      • With Australia, exports dropped -5.2% yoy to USD 4.0B, imports dropped -3.4% yoy to USD 7.3B.

      For the year as a whole,

      • With the US, exports rose 11.3% yoy to USD 478.3B, imports rose just 0.7% yoy to USD 155.1B.
      • Trade surplus with the US jumped 17.2% yoy to USD 323.2B, highest on record.
      • With EU, exports 9.8% yoy to USD 408.6B, imports rose 11.7% yoy to USD 273.4B.
      • Trade surplus with EU rose 6.2% yoy to USD 135.1B.
      • With Australia, exports rose 14.2% yoy to USD 47.3B, imports rose 11.2% to 105.45B.
      • Trade deficit with Australia rose 8.9% yoy to USD 58.1B.

      Link to China customs department data, in simplified Chinese.

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      EU Juncker tells China: It can’t stay like this. It can’t work like this.

        European Commission President Jean-Claude Juncker complained the practices of the bloc’s “systematic rivals” in front of lawmakers in Germany yesterday. He said “Chinese companies have free access to our markets in Europe, but we don’t to the markets in China”, and “it can’t stay like this”.

        Also, “one country isn’t able to condemn Chinese human rights policy because Chinese investors are involved in one of their ports,” Juncker added “it can’t work like this”.

        Though, he’s not against China’s Belt and Road initiative “as long as the conditions are right”. He said, “if you don’t only meet Chinese workers on these construction sites but also European workers, then this is all feasible.”

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        Into US session: EUR dives on German yield free fall, but AUD still the weakest

          Entering into US session, Yen is back as the star performer, followed by Swiss Franc. This time, weaker than expected economic data were largely shrugged off by stocks and bond investors. Instead, renewed worry over Italy’s fiscal health boosted Italian yield up. German 10-year yield, on other hand, is in free fall on safe haven flow, breaking -0.11 handle. US 10-year yield also dives through 2.38 handle at the time of writing. Both developments help lift Yen and Swiss Franc, Dollar follows as third strongest for now.

          Australian Dollar is staying as the weakest one for today, followed by New Zealand Dollar. These two are probably the only ones who care about resumption of slowdown in China. Situation could only get worse with more tariffs ahead. Euro is currently the third weakest for today. US retail sales and Canada CPI will be the next triggers for volatility.

          Technically, EUR/JPY and GBP/JPY resume recent decline by breaking through 122.48 and 141.20 temporary lows. EUR/USD will likely take on 1.1173 minor support. Break will raise the chance of down trend resumption and target 1.1111 low next.

          In Europe, currently:

          • FTSE is down -0.04%.
          • DAX is down -0.60%.
          • CAC is down -0.48%.
          • German 10-year yield is down -0.0050 at -0.117.
          • Italian 10-year yield is up 0.0345 at 2.77.

          Earlier in Asia:

          • Nikkei rose 0.58%.
          • Hong Kong HSI rose 0.52%.
          • China Shanghai SSE rose 1.91%.
          • Singapore Strait Times dropped -0.15%.
          • Japan 10-year JGB yield rose 0.001 to -0.05.
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          China trade surplus shrank to $4.1B in Feb, US imports tumbled -35% yoy ytd

            China’s February trade balance data is rather terrible. Trade surplus shrank sharply to USD 4.1B, well below expectation of USD 27.2B. That’s primarily due to steep contraction in exports by -20.7% yoy, largest decline since February 2016. The data could be distorted by the timing of the New Year. But January and February combined, exports still dropped -4.6% yoy while imports dropped -3.1% yoy.

            Looking at some January and February combined details, trade with the US continued to deteriorate drastically . Total trade with US dropped -19.9% yoy, exports dropped -14.1% yoy but imports dropped -35.1% yoy. Trade with EU wasn’t too bad, still recorded 3.7% yoy growth in total trade, 2.4% yoy rise in exports and 5.7% rise in imports. One interesting point to note is that imports from Brazil jumped 33.5% yoy while imports from Canada rose 34.9% yoy.

            Here are some details.

            In USD terms, in Feb:

            • Total trade dropped -13.8% yoy to USD 266.3B
            • Expects dropped -20.7% yoy to USD 135.2B
            • Imports dropped -5.2% yoy to USD 131.1B
            • Trade surplus was at USD 4.1B

            In USD terms, YTD:

            • Total trade dropped -3.9% yoy to USD 662.7B.
            • Exports dropped -4.6% yoy to USD 353.2B
            • Imports dropped -3.1% yoy to USD 309.5B
            • Trade surplus was at USD 43.7B

            With US, YTD:

            • Total trade dropped -19.9% yoy to USD 76.5B
            • Exports dropped -14.1% yoy to USD 59.3B.
            • Imports dropped -35.1% yoy to USD 17.2B.
            • Trade surplus was at USD 42.1B

            With EU, YTD:

            • Total trade rose 3.7% yoy to USD 107.5B
            • Exports rose 2.4% yoy to USD 64.7B
            • Imports rose 5.8% yoy to USD 42.8B.
            • Trade surplus was at USD 21.9B.

            With AU,YTD:

            • Total trade rose 4.6% yoy to USD 24.8B.
            • Exports rose 3.3% yoy to USD 7.0B.
            • Imports rose 5.1% yoy to USD 17.8B.
            • Trade deficit was at USD 10.8B.

            Link to Chinese customs data

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            China’s PBoC lowers RRR by 1% for most banks to release CNY 400b funding support to small and micro businesses

              In a move to increase support for small and micro businesses, the People’s Bank of China lowered Reserve Requirement Ratio for most commercial and foreign banks by 1%, effective April 26. On the same day, those banks included could use the funds released by RRR reduction to repay borrowing from the PBoC, on the basis of “borrowed first, repaid first”.

              PBoC went further to explain that China’s small and micro businesses still face difficulties in financing and expensive financing. Lowering the RRR for some banks could release funding to support these businesses. The move could also increase long terming funding and lower costs of the funds. CNY 400B in funds will be released and these funds are required to be used mainly for loans to small and micro businesses

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              Italy’s “Contract for the Government of Change”

                The populist parties of the League and the 5-Star Movement signed an accord to form a ruling coalition. The agreement is called “Contratto Per Il Governo Del Cambiamento” or “Contract for the Government of Change”. Five Star leader Luigi Di Maio said on Facebook that “it has been 70 very intense days, so many things have happened, but in the end we managed to achieve what we announced in the campaign.”

                The 58-page document contains no mention of exit from the Eurozone. But it called for a review of EU governance and fiscal rules.

                Regarding fiscal policies, it said “the government’s actions will target a programme of public debt reduction not through revenue based on taxes and austerity, policies that have not achieved their goal, but rather through increased GDP by the revival of internal demand.”

                That indicates there could be less revenue and more debt for the governement in the near term. Italian 10 year yield jumps to high as 2.22 today, hitting the highest level since last July.

                The joint program will be put to vote by 5-Star and League members. After approval, it will be presented to Italian President Sergio Mattarella.

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                JPY jumps on DOW’s steep fall, USD bulls no need to panic yet

                  Yen’s rally accelerates in US session as helped by steep decline in stocks. Lackluster earnings is a factor weighing on sentiments. The lack of positive news from China-US trade talk is another. US Treasury Secretary Steven Mnuchin is in Beijing for two days of meeting. It’s common practice, a norm, as courtesy or whatever, for both sides to come out to say something nice after the first day of meeting. But so far, there is none. That could make traders a bit nervous.

                  DOW is trading down around -1% at the time of writing. And that is not unexpected. We’ve mentioned in a quick comment earlier today that price actions from 23360.29 are a triangle pattern. It may or may not extend. But an eventual downside break out is expected to 38.2% retracement of 15450.56 to 26616.71 at 23351.24. Whether there will be another up-leg before the breakout could depend on tomorrow’s non-farm payroll.

                  Back to the currency markets, we’d like to emphasized that EUR/USD is held below 1.2031 minor resistance, AUD/USD well below 0.7583, USD/CHF well above 0.9919. And even USD/CAD (CAD has been a rather resilient one) is in tight range below 1.2915. GBP/USD even extended recent decline to as low as 1.3537. The sharp fall in USD/JPY is not the end of the trend for Dollar. Instead, it just reflects that market are a bit nervous for now. And Yen also rides on the pull back in treasury yields. So Dollar bulls don’t need to panic before NFP.

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                  BoJ Kuroda: Rise of protectionism and tightening of financial conditions call for vigilance

                    BoJ Governor Haruhiko Kuroda warned that “recent rise of protectionist moves and tightening of financial conditions in some economies remind policymakers of the importance of being vigilant at all times:. And he urged to “pay more attention to protectionist moves, as global economies have become increasingly interdependent through global value chains.”

                    Domestically, Kuroda said “when 2 percent inflation target is met or is close to be met, of course we can change the target, the monetary operating target of interest rate.” But he also reiterated that “at this moment, inflation is only 1 percent, so we will continue the current yield curve control at the current level of interest.”

                    Kuroda also talked down the impact of the planned sales tax hike in 2019 and said “at this stage, there would not be any major negative impact on the economy”. He expected to impact of growth would be “much, much smaller” than from an increase in 2014.

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                    UK PMI services dropped to 52.2: Mounting evidence that Brexit worries weigh

                      UK PMI services dropped to 52.2 in October, down from 53.9 and missed expectation of 53.4.

                      Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

                      “The disappointing service sector numbers bring mounting evidence that Brexit worries are taking an increasing toll on the economy. Combined with the manufacturing and construction surveys, the October services PMI points to the economy growing at a quarterly rate of just 0.2%, setting the scene for GDP growth to weaken sharply in the fourth quarter.

                      “However, while it is not surprising to see that Brexit uncertainties are increasingly undermining business activity at this stage of the negotiations, the survey responses also suggest that the economy is facing other headwinds, including a broader global slowdown, trade wars, heightened geopolitical uncertainty and tightening financial market conditions.

                      “It therefore remains unclear as to the extent to which Brexit worries are exacerbating or obfuscating a more broad-based slowing of the economy, which would have important implications for policymaking.”

                      Full release here.

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                      MOFCOM: China to retaliate at same scale, same strength

                        Response from the Chinese MOFCOM below. Original in simplified Chinese. Below is “google-translated”:

                        China and the United States have conducted several rounds of consultations on economic and trade issues in an effort to resolve differences and achieve a win-win situation. We deeply regret that the United States has disregarded the consensus it has formed and is fickle, provoking a trade war. This move is not only damaging bilateral interests but also undermining the world trade order. China firmly opposes this.

                        China does not want to fight a trade war. However, in the face of short-sighted behavior that the United States has done against people’s disadvantages, the Chinese side has to give a strong blow back, resolutely safeguard national interests and the interests of the people, and resolutely defend economic globalization and the multilateral trading system. We will immediately introduce taxation measures of the same scale and the same strength. All the economic and trade achievements previously reached by the two parties will be invalid at the same time.

                        In today’s era, launching a trade war is not in the global interest. We call on all countries to take joint action, resolutely put an end to this outdated and regressive behavior, and firmly defend the common interests of mankind.

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                        UK Johnson: Ready for no-deal Brexit if EU can’t compromise, it’s their call

                          During a visit to a farm in Wales yesterday, UK Prime Minister Boris Johnson appeared to have no interest in meeting EU, unless they shift their position on Brexit. He said “if they can’t compromise, if they really can’t do it, then clearly we have to get ready for a no-deal exit, and I think we’ll do it …. it’s up to the EU, it’s their call.”

                          His spokesman also noted that, “the prime minister made clear that the UK will be leaving the EU on October 31, no matter what,” referring to Johnson’s call with Irish Prime minister Leo Varadkar. And, “the government will approach any negotiations which take place with determination and energy and in a spirit of friendship, and that his clear preference is to leave the EU with a deal, but it must be one that abolishes the backstop”.

                          On the other hand, the Irish government said “the Taoiseach explained that the EU was united in its view that the Withdrawal Agreement could not be reopened.”

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                          Hong Kong Central Bank Intervenes as HKD Hit Weak Side of Trading Band

                            The Hong Kong Monetary Authority (HKMA) has just intervened in the currency market as the HK dollar (HKD) hit the weak side (7.85) of the trading band against US dollar (USD), the first time since 2005. The de facto central bank of the city has bought HK$816M Hong Kong dollars from the currency market. The intervention would lower the aggregate balance to HK$178.96 billion on April 16, when the withdrawn funds will be settled. Interbank liquidity would stay ample after the withdrawal. We do not think this would help much, if any, in narrowing the spread between HIBOR and LIBOR, the key reason causing capital to flow out of Hong Kong and hence weakness of HKD. As such, we do not feel surprised to see HKD to hit the weak side of the trading band again and this might lead to further HKMA intervention.

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                            German Merkel: We won’t let ourselves be ripped off again and again

                              German Chancellor Angela Merkel said in a TV interview that “the withdrawal, so to speak, via tweet is of course … sobering and a bit depressing.” But she maintained that EU is preparing counter-measures against US steel and aluminum tariffs and added “So we won’t let ourselves be ripped off again and again. Instead, we act then too.” Regarding the upcoming automobile tariffs, Merkel said “we’ll try and see if we can prevent this… and then hope that the EU will respond again in the same unity.”

                              German Foreign Minister Heiko Maas said “in a matter of seconds, you can destroy trust with 280 Twitter characters.” Mass added that “we have to keep a cool head now and draw the right conclusions” and “Europe united is the answer to America First.”

                              Trump also singled out Germany in his twitter attacks.

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                              Australia NAB business confidence dropped to 3, house prices dropped -1.5% qoq

                                Australia NAB business confidence dropped to 3 in November, down from 5. Business conditions dropped to 11, down from 13.

                                Alan Oster, NAB Group Chief Economist noted that “the downtrend in conditions has continued in November” and, “this trend suggests that the business sector has lost some momentum since late 2017 and early 2018.” He added “confidence is now below average, suggesting that businesses themselves think momentum will slow further”.

                                On falling house prices, though, Oster noted “businesses do not yet suggest they are having a material impact.” And, “falling house prices in themselves may have a ‘wealth effect’ on households but given the prior large run up the impact of the declines to date is unclear”.

                                Full release here.

                                Also from Australia, house price index dropped for the third quarter by -1.5% qoq in Q3, matched expectation. Over the year, house priced dropped -1.9% yoy.

                                Among the capital cities, Sydney’s house prices dropped -1.9% qoq, -4.4% yoy. Melbourne’s dropped -2.6% qoq, -1.5% yoy. However, gains was recorded in Hobart (1.3% qoq, 13.0% yoy), Adelaide (0.6% qoq, 2.0% yoy) and Brisbane (0.6% qoq, 1.7% yoy).

                                Full release here.


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                                RBA Kent: Without rate cuts, Aussie dollar might have been higher

                                  RBA Assistant Governor Kent said in the Q&A of a speech that the exchange rate transmission from interest rate cuts have been “broadly working as you would expect.” Though, the Australian Dollar exchange rate was supported by a “welcome” increase in commodity prices, as well as dovish turn in other major central banks. That came even after the central bank’s back-to-back rate cuts in June and July.

                                  Kent emphasized that “doesn’t mean the reductions in the cash rate here have not had their effect on the exchange rate in the normal way, it’s just that there have been other forces.” And, “you could say well, absent reductions in the cash rate, the Aussie dollar might have been higher.”

                                  On monetary policy, he said RBA is “a long way away from something like” quantitative easing. He noted elsewhere, QE was started “in the depths of the financial crisis when the credit system was quite impaired”. But “that’s not the sort of thing I think people have at the back of their minds here.” And monetary policies should be tailored to “your own economic circumstances”.

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                                  Italy PMI services rose to 50.4, but not much sign of relief

                                    Italy PMI services rose to 50.4 in February, up from 49.7 and beat expectation of 49.5. Markit noted that “activity rises slightly in February”, “new orders fall for first time since February 2015”, and there was “third consecutive fall in selling prices”.

                                    Commenting on the PMI data, Amritpal Virdee, Economist at IHS Markit said:

                                    “With the Italian economy currently in a recession (its third in the past ten years), February’s Italian Services PMI data did not provide much sign of relief.

                                    “Inflows of new business contracted for the first time in four years, amid the third month of falling output charges, signalling that attempts by service providers to stimulate customer demand are not always proving effective.

                                    “Despite positive signs in the form of an increase in payroll numbers and an up-tick in optimism, the latest PMI data indicates that the private sector remains on course for a further contraction in the first quarter of 2019.”

                                    Full release here.

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                                    China lowers RRR by 1% for some banks to release CNY 750B funds

                                      China’s central bank PBoC announced on Sunday to cut the reserve requirement ratio (RRR) for some lenders by 1%, effective October 15. According to the bank’s statement, this will release a total of CNY 1.2T. Of which, CNY 0.45T will be used to repay existing medium-term funding (MLF) facilities which will mature on the same date. The cut will apply to large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

                                      PBoC said that objective of the RRR cut is to “optimize the liquidity structure and enhance the financial ability of financial services.” Release of CNY 750B of funds can “increase the financial institutions’ support for small and micro enterprises, private enterprises and innovative enterprises, promote the vitality and resilience of economic innovation, enhance the growth of endogenous economic growth, and promote the healthy development of the real economy.”

                                      PBoC also maintained that despite the RRR cut, monetary policy is “stable and neutral” and the “orientation has not changed”. It added that the cut added liquidity but monetary policy is “not relaxed while market interest rate is stable. PBoC does not expect “depreciation pressure” on the Chines Yuan after the move.

                                      PBoC’s statement and Q&A in simplified Chinese.

                                      Overall, to us, the central bank’s RRR cut is clearly a pre-emptive counter measures to the market volatility last week. That is, the steep decline in Asian equities as well as surge in global treasury yields, which China was on holiday for a whole week. It’s measures to stabilize the Chinese market when it’s back from holiday tomorrow. We’ll have too see the reactions in the Shanghai SSE and USD/CNH tomorrow to see how the cut is received by the markets.

                                      Meanwhile, we will cancel the AUD/USD short strategy as noted in weekly report, and see how the markets react first.

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                                      China import from US dropped massive -31.8% in Q1, healthy trade growth with EU

                                        Latest trade data from China showed that total trade between US and China shrank -15.4% in Q1, comparing with last year, as result of trade war. In particular, imports from US dropped a massive -31.8% yoy in the quarter. On the other hand, imports from Canada jumped 25.9% yoy and imports from Brazil surged 23.8% yoy. Overall trade growth with EU remained healthy.

                                        China trade surplus widened to USD 32.6B in March, well above expectation of USD 8.1B. Exports jumped 14.2% yoy in USD 198.7B, well above expectation of 7.7% yoy. Imports, however, dropped -7.6% yoy to USD 166.0B, much weaker than expectation of -0.1% yoy. Cumulative from January to March, expects rose 1.4% yoy to USD 551.8B. Imports dropped -4.8% yoy USD 475.4B. Trade surplus was at USD 76.3B.

                                        From January to March cumulative, in USD term, with EU:

                                        • Total trade rose 5.9% yoy to USD 162.6B
                                        • Exports to EU rose 8.8% yoy to USD 97.8B.
                                        • Imports from EU rose 1.8% yoy to USD 64.8B.
                                        • Trade surplus was at USD 33.0B.

                                        With US:

                                        • Total trade dropped -15.4% to USD 119.6B.
                                        • Exports to US dropped -8.5% to USD 91.1B.
                                        • Imports from USD dropped -31.8% to USD 28.5B.
                                        • Trade surplus was at USD 62.6B

                                        With AU

                                        • Total trade rose 5.7% to USD 37.9B.
                                        • Exports to AU rose 9.7% to USD 11.0B.
                                        • Imports from AU rose 4.1% to USD 26.9B.
                                        • Trade deficit was at USD 15.9.

                                        Full set of data by country here.

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                                        ECB forum live: Draghi, Powell, Lowe, Kuroda

                                          Policy panel

                                          • Mario Draghi, President, European Central Bank
                                          • Philip Lowe, Governor, Reserve Bank of Australia
                                          • Jerome Powell, Chair, Board of Governors of the Federal Reserve System
                                          • Haruhiko Kuroda, Governor, Bank of Japan (tbc)

                                            Moderator: Stephanie Flanders, Bloomberg Economics


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