Into US session: AUD recovers, Yen pulls back. But AUD/JPY just in corrective rebound

    Markets remain rather quiet today as most of the major markets are still on holiday. Though activity could back with the US later today. For now, Australian and New Zealand Dollar are the strongest ones for today so far while yen and Swiss Franc are the weakest.

    That’s probably be due to easing risk aversion as US futures point to slightly higher open. But it should be noted that a higher open doesn’t necessary mean a sustainable rebound in stocks. It could also be setting up the markets for another deep fall. Let’s see.

    For now AUD/JPY is the top mover for today. But that’s just a corrective recovery. AUD/JPY is indeed the worst performer for the month on risk aversion. It’s down -5.96% for the month, quite a distance from second top mover NZD/JPY.

    AUD/JPY’s strong break of 78.56 support last week confirmed resumption of the down trend from 90.29 high.

    More importantly, AUD/JPY failed to sustain above falling 55 week EMA on last rebound attempt. Weekly MACD was also held below zero. It’s also now broken 61.8% retracement of 72.39 to 90.29 decisively. These are also bearish signals. And fall from 90.29 could indeed be resuming larger down trend from 105.42 (2013 high). AUD/JPY should now target 61.8% projection of 90.29 to 78.56 from 83.90 at 76.65 first. Firm break there will add more credence to this long term bearish case.

     

    Into US session: Commodity currencies surge on US-China trade optimism

      Entering into US session, commodity currencies are generally higher today. Global risk appetite is boosted by optimism regarding US-China trade negotiation. In short, the prolonged three-day meeting in Beijing ended with positive comments from both sides. New Zealand Dollar leads the way, followed by Australian and then Canadian Dollar. On the other hand, Yen is the weakest one followed by Euro and then Swiss Franc.

      BoC rate decision will be a major market moving in US session. It’s expected to hold policy rate unchanged at 1.75%. But it’s far from being certain, considering recent rebound in oil prices. Also, the new economic projections might not be more dovish than markets have expected.

      In European markets, at the time of writing:

      • FTSE is up 0.94%
      • DAX is up 1.16%
      • CAC is up 1.27%
      • German 10 year yield is down slightly by -0.0001 at 0.23

      Earlier in Asia:

      • Nikkei rose 1.1%
      • Hong Kong HSI rose 2.27%
      • China Shanghai SSE rose 0.71%
      • Singapore Strait Times rose 1.12%
      • Japan 10 year JGB yield rose 0.0339 to 0.032

      Eurozone Sentix investor confidence rose to -4.5, deeper recession could be averted

        Eurozone Sentix Investor Confidence improved to -4.5 in November, up from -16.8 and beat expectation of -13.0. Current Situation Index rose to -5.5, up from -15.5. Expectations Index rose to -3.5, up from -18.0, highest since May, 2019.

        Sentix said that the indices “give hope that a deeper recession can be averted in the eurozone”. The turnaround in ECB’s monetary policy has been “well received” by investors. It’s also measuring a stronger rise in money supply aggregates again, which usually has a “stimulating effect” on the economy. Growth is also expected to be supported by “higher government spending”.

        For Germany, the Overall Index rose to -6.5, up from -19.4. Current Situation Index rose from -18.0 to -8.3.l Expectations Index rose from -20.8 to -4.8, also highest since May. “Since the trend reversal that is now becoming apparent is also being led by the Asia ex Japan region, the hope that the slide into recession can be averted is also nourishing hope for the German economy”.

        Full release here.

        SNB keeps rate at -0.75, inflation not to turn positive until 2022

          SNB left sight deposit rate unchanged at -0.75% as widely expected. The central bank “remains will to intervene more strongly in the foreign exchange market”. The overall expansionary monetary policy “remains necessary”.

          Inflation forecast is revised sharply lower. SNB projects inflation to bottom at -1.2% in Q2 2020, and stay negative with gradually improvement till Q2 2021. Inflation is not expected to turn positive until Q2 2022. The downward revision was primarily due to “significantly weaker growth prospects and lower oil prices”. The conditional inflation forecast is based on assumption that the policy rate remains at -0.75% over the horizon.

          On Swiss economy, SNB expects the low points in term of activity came in April, and GDP decline is likely to be stronger in Q2 than in Q1’s -2.6%. Despite positive developments since May, SNB anticipates “there will be only a partial recovery” for the time being. GDP “will not return quickly to its pre-crisis level”. GDP is likely to contract by -6% in 2020, worst since oil crisis in 1970s.

          In SNB’s baseline scenario for the global economy, further waves of coronavirus infections will be “successfully prevented”. But consumption, investment and demand is “likely to remain moderate for the time being”. Production capacity will be “underutilised for some time yet”. Inflation is likely to “remain modest” in most countries.

          Full statement here.

          EU Hogan seeks a reset in trade relationship with US

            EU Trade Commissioner-designate Phil Hogan told the Irish Times that he’s “seeking a reset” of the trade relationship with US. In particular, he noted that steel aluminum tariffs and threat of tariffs in response to a digital tax in Europe.

            Hogan spoked with US Trade Representative Robert Lighthizer just before Christmas. He added, “We agreed to meet in Washington in mid-January to discuss the long list of issues causing strain in the relationship between the EU and the US. There is no point in getting into the details of resolving trade irritants unless we agree a line on a common trade agenda.”

            Trump lamented Fed chair Powell for rate hikes

              Another factor that pressures the greenback is Trump again criticized the person he chose as Fed chair, Jerome Powell.

              The occasion was a fund raiser at the Hamptons on Friday. Bloomberg reported that Trump said he expected Jerome Powell to be a “cheap-money” Fed chairman and lamented that his nominee instead raised interest rates.

              Just a month ago, Trump already verbally intervened by saying in a CNBC interview that he was unhappy with Fed’s rate hikes. And that a strong dollar is disadvantageous to the US.

              Anyway, if Trump did have that expectation and Powell turned out to be not what he expected, it’s obvious that Trump is blind. Powell has been consistent with who he is, till now,  since taking up the job as Fed Governor.

              Also, there is a voting system in Fed. Being cheap-money or not, Powell only has one vote. Or, a dictator forgot this simple fact? Or is Trump just scapegoating a single person again?

              German ZEW dropped to -22.8, US-China trade settlement doesn’t diminish economic scepticism

                German ZEW Economic Sentiment dropped to -22.8 in October, down from -22.5 and beat expectation of -27.0. Current Situation Index, however, dropped to -25.3, down from -19.9, below expectation of -25.5. Eurozone ZEW Economic Sentiment dropped to -23.5, down from -22.4, better than expectation of -26.7. Eurozone Current Situation also dropped sharply by -10.8 to -26.4.

                “The slight decrease in both the ZEW Indicator of Economic Sentiment and the situation indicator shows that financial market experts continue to expect a further deterioration of the German economy. The recent settlement in the trade dispute between the USA and China does not seem to diminish economic scepticism at this stage,” comments ZEW President Professor Achim Wambach.

                Full release here.

                Little progress made at 7th Brexit talks

                  Little to no progress was made in at the seventh round of Brexit negotiations. EU’s chief negotiator Michel Barnier said “those who were hoping for negotiations to move swiftly forward this week will have bee disappointed and unfortunately I too am frankly disappointed and concerned, and surprised as well.”

                  Barnier further criticized, “the British negotiators have not shown any real willingness to move forward on issues of fundamental importance for the European Union and this despite the flexibility which we have shown over recent months.”

                  On the other hand, UK’s chief negotiator David Frost said, “substantive work continues to be necessary across a range of different areas of potential UK-EU future cooperation if we are to deliver it. We have had useful discussions this week but there has been little progress.”

                  Frost also blamed that “the EU is still insisting not only that we must accept continuity with EU state aid and fisheries policy, but also that this must be agreed before any further substantive work can be done in any other area of the negotiation, including on legal texts. This makes it unnecessarily difficult to make progress.”

                  US and China held top level trade calls on core issues

                    A phone call was held between US and China top trade negotiators this morning. Accord to statement of China’s Ministry of Commerce: “Both sides discussed resolving core issues of common concern, reached consensus on how to resolve related problems and agreed to stay in contact over remaining issues for a phase one agreement”.

                    Chinese Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin participated in the call. Also, joined were Chinese Commerce Minister Zhong Shan, People’s Bank of China Governor Yi Gang and Ning Jizhe, vice chairman of China’s top economic planning body, the National Development and Reform Commission.

                    Yet, after another phone calls, there is no concrete news regarding the phase one trade deal. It’s reported that farm purchases and tariff rollbacks are currently the two sticky issues. It looks like officials from both sides are still targeting to complete the phase one by the end of the year. But negotiations could eventually drag on to next year.

                    France GDP grew 0.3% in Q3, household consumption accelerated

                      France GDP grew 0.3% qoq in Q3, unchanged from Q2’s rate, and beat expectation of 0.2% qoq. Looking at some details, household consumption expenditures accelerated slightly (0.3% after 0.2%), while total gross fixed capital formation decelerated (GFCF: 0.9% after 1.2%). Overall, final domestic demand excluding inventory changes remained dynamic and grew at the same pace as the previous quarter: it contributed 0.5 points to GDP growth.

                      Full release here.

                      US ISM services dropped sharply to 62.0, much worse than expectation

                        US ISM Services dropped sharply from 69.1 to 62.0 in December, much worse than expectation of 67.2. Looking at some details, business activity/production dropped from 74.6 to 67.7. New orders dropped from 69.7 to 61.5. employment dropped from 56.5 to 54.9. Supplier deliveries dropped from 75.7 to 63.9. Prices rose slightly from 82.3 to 82.5.

                        ISM said: “The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for December (62 percent) corresponds to a 4.5-percent increase in real gross domestic product (GDP) on an annualized basis.”

                        Full release here.

                        Australia GDP grew 0.5% in Q2, strengthen the case for RBA rate cut

                          Australia GDP grew 0.5% qoq in Q2, matched expectations. Annual growth slowed to 1.4%, way slower than 3.1% a year ago and was the worst since 2009. ABS Chief Economist for Bruce Hockman, noted “the external sector drove GDP growth this quarter, while growth in the domestic economy remains steady”. Net exports added 0.6% to Q2’s growth, reflecting strong exports of mining commodities. He added, “strength in mining related activity was seen across a number of measures in the economy”.

                          Full release here.

                          According to Westpac, today’s data strengthened the case for further RBA rate cut in the very near term. To achieve RBA’s growth forecasts of 2.5% for 2019, the economy needs to register 1.6% growth in the second half. That’s seen as out of reach while recent retail and housing data were also disappointing. Westpac expects another RBA cut in October.

                          NZ BNZ manufacturing climbs to 49.3, a glimmer of hope in ongoing recession

                            New Zealand BusinessNZ Performance of Manufacturing Index rose from 47.5 to 49.3 , marking the highest point in a year. However, the sub-50 reading indicates that the sector remains in contraction for the twelfth consecutive month.

                            A closer examination of the components reveals a mixed bag of progress and setbacks. Production saw a significant leap from 42.9 to 49.1, reaching its peak since January 2023. Contrarily, employment edged down to the breakeven point of 50.0 from 51.3. New orders continued to struggle, remaining unchanged at 47.8 and indicating contraction for the ninth month in a row, reflecting the ongoing difficulty in securing new business. Finished stocks and deliveries both saw improvements, with deliveries crossing into expansion territory at 51.4, the highest since March 2023.

                            Despite these developments, the sector’s sentiment remains cautious, with 62% of comments being negative in February, marginally less pessimistic than January’s 63.2% but more so than December’s 61%. The primary concerns among respondents were a lack of orders, both domestically and internationally, and a general slowdown in the economy.

                            Stephen Toplis, BNZ’s Head of Research acknowledged that while New Zealand’s manufacturing sector “is still in recession”, the latest PMI data signals “there is light at the end of the tunnel”. The proximity of the PMI to the “breakeven” threshold and the positive differential between new orders and inventory suggest an upcoming increase in production.

                            Full NZ BNZ PMI release here.

                            EU Juncker pushes to strengthen Europe’s role in the world stage

                              In his annual State of the Union address, European Commission President Jean-Claude Juncker urged the EU to “become a more sovereign actor on the world stage.” He added that “if Europe were to unite all the political, economic and military might of its nations, its role in the world could be strengthened.” And, “we will always be a global payer but it is time we started being a global player too.”

                              His proposals include promoting the euro currency abroad to compete with the US dollar, maintaining close ties with the UK after Brexit through free trade agreement, new rules to crack down on cross-border terrorism, tackling migration by increasing resources to the EU border and coastguard and, a trade deal with Africa for attracting investments and job creation.

                              On Brexit, Juncker said “I welcome Prime Minister May’s proposal to develop an ambitious new partnership for the future, after Brexit. We agree with the statement made in Chequers that the starting point for such a partnership should be a free trade area between the United Kingdom and the European Union.”

                              US PCE inflation rose to 5.7% yoy, core CPI to 4.7%, highest since 80s

                                US personal income rose 0.4% mom mama, or USD 90.4B in November, matched expectations. Personal spending rose 0.6% mom or USD 104.7B, also matched expectations.

                                Headline PCE price index accelerated to 5.7% yoy, up from 5.1% yoy, above expectation of 5.6% yoy. That’s the highest level since 1982. Core PCE price index accelerated to 4.7% yoy, up from 4.2% yoy, above expectation of 4.5% yoy. That’s the highest level since 1989.

                                Full release here.

                                RBNZ Hawkesby: Negative rate is not a game of bluff

                                  RBNZ Assistant Governor Christian Hawkesby said the central bank is still “very much in the mindset of ‘have we provided enough stimulus, and if we need to provide more what is the best way to do that?'” And that is what “motivated our work around active preparation of a package of further tools.”

                                  He emphasized that negative interest rate is “not a game of bluff” to talk down the New Zealand Dollar exchange rate. Though, “the biggest challenge about having a negative policy rate is the communication challenge,” he said. “How to explain it to the general public, how to explain it as a policy, how to win the argument, how to retain hearts and minds that you’re doing the right thing for the right reasons.”

                                  High-level conversations still going on NAFTA talks

                                    Several high level Canadian officials are in Washington today to work out a path for NAFTA negotiation ahead. The delegation include Brian Clow, Prime Minister Office’s coordinator of US affairs.

                                    Canada’s ambassador to the US, David MacNaughton, also said there are high-level conversations going on. He said “we will do an assessment of where are we and is there a chance of pulling all this together in a fairly rapid fashion or not?” He added that “we’re pretty close” even though there are still “some tough issues to deal with”.

                                    Also MacNaughton noted that the US objective in the talks was to reduce trade deficit. And, “eighty per cent of that deficit has to do with autos. We’re that close on autos.”

                                    US ADP employment grew 807k in Dec, broad-based gains

                                      US ADP private employment grew 807k in December, much better than expectation of 358k. Looking at some details, small businesses added 204k jobs. Medium businesses added 214. Large businesses added 389k. By sector, goods-producing jobs grew 138k. Service-providing jobs grew 669k.

                                      “December’s job market strengthened as the fallout from the Delta variant faded and Omicron’s impact had yet to be seen,” said Nela Richardson, chief economist, ADP. “Job gains were broad-based, as goods producers added the strongest reading of the year, while service providers dominated growth. December’s job growth brought the fourth quarter average to 625,000, surpassing the 514,000 average for the year. While job gains eclipsed 6 million in 2021, private sector payrolls are still nearly 4 million jobs short of pre-COVID-19 levels.”

                                      Full release here.

                                      Canada Freeland: Illegal US 232 steel tariffs should be removed to move ahead with USMCA

                                        After meeting with US Trade Representative Robert Lighthizer in Washington yesterday, Canadian Foreign Minister Chrystia Freeland warned that the US steel tariffs raised serious questions on support for ratification of the new NAFTA, now known as USMCA.

                                        She said “the existence of these tariffs for many Canadians raises some serious questions about NAFTA ratification”. And, “in order to move ahead with that deal, I think Canadians feel the right thing is, there should be no 232 tariffs or retaliatory tariffs between our two countries.”

                                        Freeland raised the issue to Lighthizer clearly and emphasized “these tariffs are completely unacceptable to Canada,” repeating the words “illegal,” “unjustified” and “absurd” several times in describing them.

                                        ECB downgrades 2020 growth to 0.8%, oil price fall poses significant downside risks to inflation

                                          In the post meeting press conference, ECB President Christine Large warned that the spread of coronavirus has been as “major shock” to global and Eurozone growth prospects. And, “even if ultimately temporary in nature, it will have a significant impact on economic activity”. There will be slowdown in production as a result of supply chains disruption, reduced domestic and foreign demands. In addition, the heightened uncertainty negatively affects expenditure plans and their financing.”

                                          She urged government and all other policy institutions to “take timely and targeted actions to address the public health challenge of containing the spread of the coronavirus and mitigate its economic impact”. In particular, “an ambitious and coordinated fiscal policy response is required to support businesses and workers at risk.”

                                          In the march ECB staff macroeconomic projections, GDP growth for 2020 was downgraded from 1.1% to 0.8%, with “very muted growth in H1. 2021 growth was revised down from 1.4% to 1.3%. 2020 HICP inflation is projected at 1.1%, and 1.4% in 2021, unchanged. But recent sharp decline in oil prices poses significant downside risks to short-term inflation outlook.

                                          Full introductory statement here.