Thu, Aug 22, 2019 @ 09:42 GMT

CAD staying the weakest after BoC, DOW shows resilience

    The US session is so far rather dull. Canadian Dollar remains the weakest one for the day and the week. Cautious BoC statement gave the Loonie no support. Fresh selling is seen, together with rebound in US stocks. Talking about stocks, they’re rather resilient so far. There are rumors that Trump is going to sign presidential proclamation tomorrow regarding the steel and aluminum tariffs.

    DOW dipped to as low as 24571.50 but recovered. Risk stays on the downside. As we pointed out before, 25000 seems to be tough hurdle. But stocks’ reaction to the Gary Cohn resignation news is rather muted.

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    ECB and BOE activate currency swap arrangements

      ECB and BoE announced to activate currency swap arrangements ahead of Brexit. Under the arrangement, BoC will offer to lend Euro to UK banks on a weekly basis. BoE will also obtain Euro from ECB in exchange for Sterling. Also, Eurosystem would stand ready to lend Sterling to Eurozone banks if needed.

      ECB said “the activation marks a prudent and precautionary step by the Bank of England to provide additional flexibility in its provision of liquidity insurance, supporting the functioning of markets that serve households and businesses.”

      Full statement here.

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      UK May: It’s now up to EU27 leaders to approvide the declaration on future relationship

        UK Prime Minister Theresa May hailed the draft declaration of future relationship with the EU as she spoke to reporters in Downing Street. She added, “The British people want this to be settled, they want a good deal that sets us on course for a brighter future … That deal is within our grasp and I am determined to deliver it.”

        She said “The agreement we’ve reached is between the UK and the European Commission. It is now up to the 27 leaders of the other EU member states to examine this agreement in the days leading up to the special EU council meeting on Sunday.”

        Regarding Gibraltar, May is confidence after speaking to Spanish Prime Minister Pedro Sanchez. She added “I am confident that on Sunday we’ll be able to agree a deal that delivers for the whole UK family, including Gibraltar.”

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        ECB de Guindos: De-anchoring of inflation expectations needed before more monetary stimulus

          Over the weekend, ECB Vice President Luis de Guindos said current monetary policy is “fully compatible with both inflation and real activity.” And, “de-anchoring of inflation expectations” is needed before ECB ease monetary policy again.

          He told Italian newspaper Corriere della Sera that “what we need to see is a de-anchoring of inflation expectations” for more policy stimulus. However, “this has not yet happened, despite the fact that there has been a drop in market-based inflation expectations.” “If there is a further deterioration, then we will react,” de Guindos added. “But for now, our monetary policy stance is fully compatible with both inflation and real activity.”

          On the impact of global trade tensions, de Guindos said “you can certainly smooth the impact with monetary policy, but you will not be able to address and fix this kind of problems with monetary policy”.

          Separately, Governing Council member Ewald Nowotny said it would be “reasonable” to have “some more flexibility” on inflation target. And, he was “in favor of keeping the 2 percent target but with a corridor of 0.5 or 1 percent, up or down. A precision landing is hardly possible.”

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          Euro stays strongest after jitters, EURAUD with solid upside bias

            After some jitters yesterday, EUR remains the strongest major currency for the week as seen in W heatmap. Strength is apparent against USD, GBP and AUD. Meanwhile, JPY is trading as the weakest, followed closely by USD, CHF and AUD.

            Looking at EURAUD action bias table, the biases are consistent across time frame.

            And EURAUD is seen as in up trend in 6H, D and W charts. So, the current H neutral could present an opportunity to long EUR/AUD.

            An intraday strategy could be buying at PP at 1.6120 with a stop below S1 at 1.6081.

             

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            EU Juncker: Crystal clear, no Brexit renegotiation

              European Commission President Jean-Claude Juncker reiterated EU’s stance that Brexit agreement is not open for renegotiation. He said before a meeting of EU leaders in Brussels, “I will have a short meeting with Theresa May, but I was crystal clear. There will be no renegotiation.”

              That’s in complete opposite of what some UK ministers believe in. Foreign ministers Jeremy Hunt wrote in Tuesday’s Daily telegraph. He noted “trying to deliver no deal through a general election is not a solution; it is political suicide… “A different deal is, therefore, the only solution – and what I will pursue if I am leader.”

              Trade Minister Liam Fox also said “If the EU doesn’t want to negotiate any changes – which I think would be unfortunate and I think would be quite surprising – then I think that of course does increase the chance of a no-deal exit.”

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              ECB Lane: Fairly sure core inflation on upward path

                ECB Governing Council Member Philip Lane said policymakers are “fairly sure that core (inflation) is on an upward path”, “not spectacular but steady enough”. Also, he added “the support of more jobs, more labor income driving consumption is very strong.”

                He also reiterated ECB’s forward guidance that interest rates will stay at present levels at least through summer of 2019. But he also noted that “it is not committing to any particular date for lift-off, so there is a clear commitment there, which is that it’s open to revisions depending on where the data come in.”

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                Japan unemployment rate dropped, so was consumer confidence

                  The batch of economic data released from Japan today is mixed. Unemployment rate dropped to 2.4% in April, down from 2.5%, matched expectations. However, better employment was not reflected in retail sales nor consumer sentiment. Retail sales rose 0.5% yoy, missed expectation of 1.0% yoy. Consumer confidence dropped to 39.4, below expectation of 40.6.

                  Meanwhile, industrial production rose 0.6% mom in April, above expectation of 0.2% mom. However, the road ahead could be bumpy with trade war escalation in May. Housing starts dropped -5.7% yoy in April, below expectation of -0.8% yoy. Tokyo CPI core slowed to 1.1% yoy in May, down from 1.3% yoy and missed expectation of 1.2% yoy.

                  Yen is the strongest one for today so far, mainly thanks to Trump’s announcement to use tariff to curb illegal immigration through Mexico. USD/JPY drops through 109.02 support finally. Fall from 112.40 is resuming for 61.8% retracement of 104.69 to 112.40 at 107.63 next.

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                  An update on AUD/USD short

                    Here’s an update on AUD/USD short (sold at 0.7100), last updated here.

                    The trade is so far doing ok as risk aversion realized. But we’ve overestimated the strength in Dollar. Still, the price actions from 0.7040 to 0.7130 are corrective looking, which reinforces our bearish view. For now, we’ll keep the stop at 0.7185, slightly above 50% retracement of 0.7314 to 0.7040 at 0.7178. That’s because, theoretically speaking, consolidation pattern from 0.7040 could extend with another leg through 0.7130, even though it’s unlikely. Upon decisive break of 0.7040, we’ll lower the stop after AUD/USD settles below this level.

                    Our view is unchanged that medium term fall from 0.8135 could be resuming long term down trend. Hence, we have not decided whether to exit at around 0.6826 low yet. We’ll monitor downside momentum in both 4H and daily chart to decide at a later stage.

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                    UK RICS house price balance dropped to six year low, never-ending Brexit negotiation a key drag

                      UK RICS house price balance dropped to -10 in October, down from -2. That’s also the weakest reading since September 2012. RICS noted that “The weaker trend in prices is being driven by the lack of demand from new buyers, which is in part a result of heightened political uncertainty, ongoing affordability pressures, a modest upward move in interest rates and a lack of fresh stock coming onto the market.”

                      RICS Chief Economist Simon Rubinsohn also noted that “uncertainty about the economic outlook on the back of the never-ending Brexit negotiations appears a key drag on sentiment according to respondents to the survey.”

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                      UK Lidington: Useful discussions with Brussels, but very difficult to reopen negotiations

                        UK Minister for the Cabinet Office David Lidington said today that the government is having useful discussion with Brussels. However, it’s still very difficult to reopen withdrawal agreement negotiation.

                        He told BBC radio that “My experience last week… was that they were a lot more than courtesy calls. It was a very useful discussion about the politics, both within the United Kingdom and within the EU27, and a scoping out of what was possible.” However, Lidington also noted that “Reopening the withdrawal agreement… will be very difficult.”

                        Brexit Minister Steve Barclay will meet EU’s chief Brexit negotiator today.

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                        UK Hammond said Brexit deal do-able in 6-8 weeks, but will be less detailed

                          UK Chancellor of Exchequer Philip Hammond told upper house of parliament today that a Brexit deal can be agreed in 6-8 weeks with EU. Though, the agreement would be less detailed. He said “there’s merit in having quite a bit of detail, but clearly we don’t have enough time to negotiate the full draft legal text in what will be quite a complex future partnership agreement.”

                          Hammond’s Treasury also announced earlier today that BoE Governor Mark Carney will extend his term till January 2020. Hammond also told MPs that “if we leave the European Union without a deal… we could expect a period when there would be some turbulence and when there would be some issues arising for financial services businesses.” And, “a governor who was leaving at the end of June, with his bags already packed, would be in a poor position to represent the UK in what might be some quite critical – and time critical – negotiations over that period.”

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                          White Hourse Sanders: We’ll continue the maximum pressure if Kim-Trump meting doesn’t take place

                            In response to North Korea’s threat of cancelling the Kim-Trump summit, White House press secretary Sarah Huckabee Sanders said Trump is still hopeful that the meeting will take place. She said on Fox news that “we’re ready to meet and if it happens, that’s great. And if it doesn’t, we’ll see what happens.”

                            And she added “we’ve been prepared that these could be tough negotiations. The president is ready if the meeting takes place and if it doesn’t, we’ll continue the maximum pressure campaign that’s been ongoing.”

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                            BoJ Masai: US protectionist moves are downside risk of greatest concern

                              BoJ board member Takako Masai said in a speech that “outcome of protectionist moves in the United States as the downside risk that is of greatest concern”. In the short term, “growing uncertainty over U.S. trade policy will likely lead to a sharp rise in volatility in global financial markets”. This could lead to “adverse effects on the sentiment of firms and households.”

                              In the medium-to-long term, “if such protectionist moves were to increase globally, this may significantly affect the business strategies of global firms, and the subsequent impact on the capital flow of trade and investment cannot be ignored. ” Masai added he will closely monitor “whether the protectionist moves entail the risk of causing any imbalances in the global capital allocation.”

                              Full speech here.

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                              Mid-US update: Dow rises 360 pts, EUR/USD back in range after brief spike

                                Yen and Swiss Franc are trading as the weakest ones as risk appetite return to the markets today. Dollar gets no support from the strong rebound in US equities, as treasury yields are essentially flat.

                                Meanwhile, New Zealand Dollar, Canadian Dollar and Sterling are the strongest ones.

                                Dollar was sold off in early US session as EUR/USD broke 1.1610 minor resistance. But the pair quickly lost steam and is now back in familiar range.

                                At the time of writing, DOW is trading up 1.38%, S&P 500 up 1.43% and NASDAQ up 1.84%. Five-year yield is up 0.004, 10-year yield down -0.002, 30-year yield down -0.003. While DOW’s rebound is strong, it should be reminded that it’s more likely a corrective move than not. And, it’s already close to first hurdle of 38.2% retracement of 26951 to 24845.10 at 25649.86, which is close to 55 H EMA at 25706. We’ll see whether DOW could extend the rebound through this hurdle, or get an instant rejection from it before today’s close.

                                In Europe, stock closed broadly higher on late buying.

                                • FTSE rose 0.43% to 7059.40
                                • DAX rose 1.40% to 11776.55
                                • CAC rose 1.53% to 5173.05
                                • German 10 year yield dropped -0.0102 to 0.495
                                • Italian 10 year yield also dropped -0.0928 to 3.462
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                                Mid-US update: Stock rally losing momentum, treasury yield jumps

                                  US stocks surge in initial trading, with S&P 500 and NASDAQ extending recent record run. The moves seem to have exhausted their momentum. No follow through buying is seen after S&P 500 hit 2903.77 and NASDAQ hit 8046.31. Both indices have indeed turned red at the time of writing and DOW is up only 0.06%.

                                  In the currency markets, Canadian Dollar is now the strongest one, followed by Swiss Franc and then Euro. The US seems to be optimistic in the trade negotiations with Canada. Treasury Secretary Mnuchin said today that “the U.S. market and the Canadian markets are very intertwined.” And, ‘it’s important for them to get this deal and it’s important for us to get this deal.” He said the agreement could be concluded within this week.

                                  On the other hand, Sterling suffers fresh selling in US session, in particular against Euro and Swiss Franc. Yen follows as the second weakest. Dollar is the third weakest even though data showed consumer confidence rose to highest since October 2000.

                                  One development to note is the strong rally in treasury yields. It’s believed to have started from Germany as 10 year bund yield jumps 0.10 to 0.38. The move is on the back on news that Germany is considering to extend financial aid to Turkey, to prevent knock-on effect from deterioration in the latter’s economy. But the WSJ report also noted that the discussions are in very early stage, and the talk could eventually fall apart.

                                  Nevertheless, the over developments help lift 10 year US yield sharply higher. At the time of writing it’s up 0.27 at 2.875. The rebound also marks strong support from 2.811 and focus is back of 55 day EMA (now at 2.892). Break there will bring 3% handle back in radar.

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                                  25000 too much for DOW? Mnuchin backs tariffs

                                    25000 proves to be too much for DOW? It opened higher and hit as high as 24995.24. But stocks seem to response negatively to Treasurer Steve Mnuchin’s backing on steel and aluminum tariffs. Mnuchin said in House:

                                    • Regarding Trump’s tariffs – “I am supportive of them and I am supportive of the mechanisms that the president has announced,”
                                    • “To the extent that we’re successful in renegotiating Nafta, those tariffs won’t apply to Mexico and Canada.” (same position as Trump)
                                    • “We’re not looking to get into trade wars.”
                                    • “We’re looking to make sure that U.S. companies can compete fairly around the world.”
                                    • He brought up China too. (?!) “President Trump has been very clear: We want to make sure U.S. companies have the same ability to do business in China as Chinese companies have here.”
                                    • And, “our priority at the moment is to renegotiate NAFTA and to focus on our trade relationships with China and have fair and balanced trade with China.”

                                    Facts: China is the 11th imports of steel to US in 2017. India ranked 10 with contribution merely 2%. Canada was top at 16%, Mexico 4th at 9%.

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

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

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

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

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                                      CAD trading lower after retail sales and CPI

                                        Canadian Dollar trades notably lower after weaker than expected data.

                                        Headline retail sales rose 0.6% mom in March, above expectation of 0.4% mom. However, ex-auto sales was a big miss, contracted -0.2% mom versus consensus of 0.5% mom growth.

                                        Headline CPI slowed to 2.2% yoy in April, down from 2.3% yoy, and missed expectation of 2.3% yoy. CPI core common was unchanged at 1.9% yoy. CPI core median was unchanged at 2.1%. CPI core trim rose to 2.1% yoy.

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                                        UK Johnson: Brexit presents enormous opportunities for our country

                                          Sterling’s selloff continues today as markets are adding their bets to no deal Brexit. UK Prime Minister Boris Johnson is insisting that he could get a new Brexit deal with the EU. He said in televised comments that “we’re very confident, with goodwill on both sides, two mature political entities — the U.K. and EU — can get this done”.

                                          And, “it’s responsible for any government to prepare for a no deal if we absolutely have to. That’s the message I’ve been getting across to our European friends. I’m very confident we’ll get there.” He also insisted that the Irish backstop is “dead” along with former PM Theresa May’s withdrawal agreement.

                                          Johnson also emphasized that “Once we leave the EU on Oct. 31, we will have a historic opportunity to introduce new schemes to support farming – and we will make sure that farmers gets a better deal”. And, “Brexit presents enormous opportunities for our country, and it’s time we looked to the future with pride and optimism.”

                                          At this point, there is no sign of EU shifting its position yet. That is, the negotiation for the Brexit Withdrawal Agreement was closed and won’t be re-opened. European Commission also indicated that while an orderly withdrawal is in everyone’s interest, the bloc is well-prepared for a no-deal Brexit.

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