Japan, South Korea and China in first trilateral talk since 2015

    Japanese Prime Minister Shinzo Abe, South Korean President Moon Jae-in and Chinese Premier Li Keqiang are meeting in Tokyo today for the first trilateral summit since 2015. As the host of the meeting, Abe said that “for our three nations, building future-oriented cooperative relations is extremely important for the region as a whole.” And he urged the three nations to “stay in close touch with international society and demand that North Korea take concrete moves” on denuclearization.

    China’s Li expressed the willingness to “work with Japan and South Korea to jointly maintain regional stability and push forward the development of the three countries.” Separately, China is set to sign a currency swap agreement with Japan, and grant the country a quota of Renminbi Qualified Foreign Institutional Investors (RQFII) for investments.

    WTI oil above 70, 10 year yield at 2.99, JPY weakens after Trump’s Iran deal withdrawal

      Reactions to Trump’s pull out of the Iran deal were rather muted. DOW ended up 0.01% at 24360, S&P 500 down -0.03%, NASDAQ up 0.02%. WTI crude oil reversed initial loss and is back above 70.5. 10 year jumped together with oil and is back at 2.99. Yen is thus, under some pressure and trades broadly lower in Asian session.

      Elsewhere in the currency markets, Canadian Dollar recovers broadly, follow oil price. Dollar is supported by rebound in yields while NZD is trading higher ahead of tomorrow’s RBNZ rate decision.

      UK, Germany and France urged US not to obstruct JCPoA Iran deal implementation

        Below is the full joint statement of the UK, Germany and France.

        Joint statement from Prime Minister Theresa May, Chancellor Angela Merkel and President Emmanuel Macron following President Trump’s statement on Iran.

        It is with regret and concern that we, the Leaders of France, Germany and the United Kingdom take note of President Trump’s decision to withdraw the United States of America from the Joint Comprehensive Plan of Action.

        Together, we emphasise our continuing commitment to the JCPoA. This agreement remains important for our shared security. We recall that the JCPoA was unanimously endorsed by the UN Security Council in resolution 2231. This resolution remains the binding international legal framework for the resolution of the dispute about the Iranian nuclear programme. We urge all sides to remain committed to its full implementation and to act in a spirit of responsibility.

        According to the IAEA, Iran continues to abide by the restrictions set out by the JCPoA, in line with its obligations under the Treaty on the Non-Proliferation of Nuclear Weapons. The world is a safer place as a result. Therefore we, the E3, will remain parties to the JCPoA. Our governments remain committed to ensuring the agreement is upheld, and will work with all the remaining parties to the deal to ensure this remains the case including through ensuring the continuing economic benefits to the Iranian people that are linked to the agreement.

        We urge the US to ensure that the structures of the JCPoA can remain intact, and to avoid taking action which obstructs its full implementation by all other parties to the deal. After engaging with the US Administration in a thorough manner over the past months, we call on the US to do everything possible to preserve the gains for nuclear non-proliferation brought about by the JCPoA, by allowing for a continued enforcement of its main elements.

        We encourage Iran to show restraint in response to the decision by the US; Iran must continue to meet its own obligations under the deal, cooperating fully and in a timely manner with IAEA inspection requirements. The IAEA must be able to continue to carry out its long-term verification and monitoring programme without restriction or hindrance. In turn, Iran should continue to receive the sanctions relief it is entitled to whilst it remains in compliance with the terms of the deal.

        There must be no doubt: Iran’s nuclear program must always remain peaceful and civilian. While taking the JCPOA as a base, we also agree that other major issues of concern need to be addressed. A long-term framework for Iran’s nuclear programme after some of the provisions of the JCPOA expire, after 2025, will have to be defined. Because our commitment to the security of our allies and partners in the region is unwavering, we must also address in a meaningful way shared concerns about Iran’s ballistic missile programme and its destabilising regional activities, especially in Syria, Iraq and Yemen. We have already started constructive and mutually beneficial discussions on these issues, and the E3 is committed to continuing them with key partners and concerned states across the region.

        We and our Foreign Ministers will reach out to all parties to the JCPoA to seek a positive way forward.

        Muted reaction to Trump’s withdrawal from Iran deal. USD, CHF, JPY stay in pole position

          Trump announced to withdraw from the Iran deal. Market reactions are relative limited as it seems like it’s all expected. DOW turns from initial loss to slight gain. But technically, it still has to overcome 55 day EMA (now sitting at 24442). The currency markets are also relatively steady. Dollar, Swiss and Yen are staying in pole positions.

           

           

          France denied that Trump told Macron on Iran deal decision

            Just earlier today, the New York times reported that Trump told French President Macron of the withdrawal of the Iran deal. And the report was “according to a person briefed on the conversation.”

            Then Reuters reported that Macron’s office denied the New York Times story.

            In the same report, Reuters said “one senior European official closely involved in Iran diplomacy told Reuters that U.S. officials had indicated late on Monday that Trump would withdraw from the agreement but it remained unclear on what terms and whether sanctions would be reimposed”.

            Again, unnamed source. Who to trust? When the President of the US can say something that overturn it completely the next day, you know what it’s like in the post-truth world.

            ECB: Corporate bond purchases sharply lowered bond spreads

              In a report published today, ECB said that it’s corporate bond purchases sharply lowered bond spreads. It said that “in the subsequent period …(to) the end of December 2017, the CSPP accounted for a decline in corporate bond spreads of, on average, 25 basis points for eligible bonds, 10 basis points for ineligible investment-grade bonds and 20 basis points for all ineligible bonds.”

              Also, “for eligible bonds, the CSPP can be credited with almost the entire decline in spreads since the announcement of the programme.”

              Full article here.

              Fed Powell: Market expectations on monetary policy reasonably aligned with policymakers’

                Fed chair Jerome Powell devliered a speech on “Monetary Policy Influences on Global Financial Conditions and International Capital Flows” in a conference in Zurich today. Powell said that “Fed policy normalization has proceeded without disruption to financial markets, and market participants’ expectations for policy seem reasonably well aligned with policymakers’ expectation.” And because that “markets should not be surprised by our actions”. And, even though there could be spillovers of Fed’s actions to other economies, the role of Fed’s monetary policy is “often exaggerated”.

                Regarding emerging market economies, Powell said that Fed and other advanced economies “played a relatively limited role” in the surge capital flow to these markets in recent years. Hence, “there is good reason to think the normalization of monetary policies in advanced economies should continue to prove manageable for” emerging economies.”

                In to US session: A look at AUDUSD and EURCHF

                  Heading into US session, CHF and JPY are notably higher against others. Commodity currencies are the weakest, together with EUR.

                  The surge in USD/CAD earlier in European session first caught out attention. As mentioned earlier, it’s on course for 1.3124 resistance.

                  Selling of AUD and EUR came in later. AUD/USD traders should have finally made up them mind to push the pair through 0.7500 key support level. Such development should confirm medium term reversal in the pair and should pave the way to 0.7328 support next.

                  Also, the steep fall in EUR/CHF suggests that it’s finally being rejected by 1.2 key handle. Break of 1.1888 support will confirm near term reversal. And deeper pull back should be seen to 38.2% retracement of 1.1445 to 1.2004 at 1.1790 next.

                   

                  Australia plans to return to budget surplus earlier, but S&P said risks are significant

                    In the 2018 Budget announced today, Australian Treasurer Scott Morrison plotted the path to return to balance in fiscal 2019/20, and turn into AUD 22b surplus in fiscal 2020/21. The move is welcomed by S&P Global Ratings. But the negative outlook on Australia’s AAA sovereign ratings is maintained.

                    S&P said in a statement after the budge release that “the budgetary position has improved over the past year, aided by strength in the Australian and global economies. ” Also, “the government has also shown a commitment to fiscal prudence with its plan to return a balanced budget earlier than previously announce.” Such developments helped “ease the negative pressures on the Australian sovereign ratings.”

                    However, “risks to the country’s fiscal outlook remain, including increasing external economic uncertainties in recent months. Global trade tensions, coupled with rising investor aversion to emerging markets in recent months, may dampen economic growth among Australia’s key trading partners.”

                    And, “risks to the government’s plan for an earlier return to budget surpluses are significant. The outlook on the long-term Australian sovereign ratings remains negative for now to reflect these uncertainties.”

                    CAD tumbles broadly, EURCAD threatens bullish reversal

                      Canadian dollar tumbles broadly as the break of 1.2913 resistance in USD/CAD spills over to other pairs. There is no apparent trigger for the selloff but markets could be positioning ahead of Trump’s announcement on Iran deal.

                      USD/CAD should now be heading to retest 1.3124 resistance next. And outlook will stay bullish as long as 1.2802 minor support holds.

                      Also, it looks like EUR/CAD’s corrective fall from 1.6151 could be completed with three waves down to 1.5315, ahead of 61.8% projection of 1.6151 to 1.5461 from 1.5712 at 1.5286, the target we mentioned here. Immediate focus is now on 1.5461 support turned resistance. Break there will affirm this case of bullish reversal and target 1.5712 resistance next.

                      Chinese Vice Premier Liu He to visit Washington next week for trade talk with US

                        White House spokesperson Sarah Sanders told reports that trade talks between US and China will resume in Washington next week.

                        She said that “we are working on something that we think will be great for everybody”

                        And, “China’s top economic adviser, the vice premier (Liu He), will be coming here next week to continue the discussions with the president’s economic team.”

                        China trade surplus at USD 28.8B, YTD imports from EU jumped 20.1%

                          In USD term, China’s exports rose 12.9% yoy to USD 200.4B in April. Imports rose 21.5% yoy to USD 171.6B. That gave to USD 28.8B in trade surplus. Year-to-date, exports rose 13.7% yoy to USD 745.7B, imports rose 19.6% to USD 668.9B, resulting in USD 76.8B in trade surplus.

                          Year-to-date, exports to the US rose 13.9% yoy to USD 135.9B while imports rose 11.6% yoy to USD 55.6B, resulting in USD 80.3B in surplus. That is, comparing with same period in 2017, China’s trade surplus to the US rose 15.6% yoy.

                          Year-to-date, exports to the EU rose 12.9% yoy to USD 121.9B while imports rose 20.1% yoy to USD 86.3B, resulting in USD 35.6B in surplus. That is, comparing with same period in 2017, China’s trade surplus to the EU dropped -1.4% yoy.

                          Also, year-to-date from January through April, total trade with the US rose 13.2% to USD 191.6B. Total trade with the EU rose 15.8% to USD 208.2B.

                          Details in this page. In simplified Chinese, but google translate can do the job on tables pretty well.

                          ECB Smets: Economic expansion continuing at a robust pace

                            Despite a soft batch of Eurozone data ECB Governing Council member Jan Smets remained optimistic. He said in a WSJ interview that “the latest data remain pretty consistent with the story of the economic expansion continuing at a robust pace.”

                            And the central bank would be ready to phase out the EUR 30b per month asset purchase program later this year. Instead, Smets said ECB would turn the policy focus toward communicating on interest rates.

                            Reuters reported sources saying the ECB policy would not want to upset market expectations. That is, investors are expecting the asset purchases to end this year and there would be finally a rate hike towards the middle of 2019.

                            Richmond Fed Barkin: Economy is remarkably strong

                              Thomas Barkin delivered his first speech as Richmond Fed President overnight and expressed his support for more rate hikes ahead. But he declined to comment on how many hikes this year he expects.

                              He noted that “monetary policy is still pretty accommodative”. And, “when unemployment is low and inflation is effectively at our target, we probably ought to go to neutral in that environment.” Also, “the economy’s performance as we sit here today is remarkably strong: above trend growth, low unemployment, inflation at target.”

                              But Barkin also warned on the risks from the trade tensions between US and other countries. He said it’s “not clear what’s going to be implemented in the end” regarding tariffs. But “there is an issue on business confidence and the business people that I talk to who were almost euphoric in January are now nervous. And they’re nervous about where the macroeconomy is going.”

                              ECB Praet blamed easter for negative surprise in Eurozone core inflation

                                ECB chief economist Peter Praet said in Geneva today:

                                • “This negative surprise in core inflation is mainly attributable to a decrease in services inflation, which is likely to be related to developments in volatile items, also reflecting the timing of Easter this year.”
                                • “On the basis of current futures prices for oil, inflation is likely to hover around 1.5 percent in the coming months,”

                                Released last week, Eurozone CPI flash slowed to 1.2% yoy in April, down from 1.3%. Core CPI was worse, slowed to 0.7% yoy, down from 1.0% yoy.

                                Atlanta Fed Bostic: Some overshoot in inflation is fine

                                  Altlanta Fed President Raphael Bostic said in an interview:

                                  • “We have seen some upward pressure” on inflation.
                                  • “We don’t have the ability to stop trends on a dime. Some overshoot is fine,”
                                  • If current trends continue, “we are going to see wages start to go up because we will truly have a scarcity of labor,”
                                  • “I am not sure there is a big signal” in that on inflation.

                                  BoC Lane: Still a significant degree of uncertainty around the trade situation

                                    Bank of Canada (BoC) Deputy Governor Timothy Lane said earlier today there are still a significant degree of uncertainty around the trade situation. While news on steel has changed a lot in the last few days, it’s still a fluid situation, not a situation of calling all clear. And even though BoC doesn’t need to stay on hold until there is more clarity, the lack of clarity has dampening effect on outlook.

                                    Lane also noted that during rate decision discussion, trade uncertainty is definitely a risk to outlook, but that’s just one of a number of factors. And for BoC, one of the reasons to be on hold is that policymakers are very cautious to make sure there is adequate taking stock of what rates are doing to households.

                                    A look at GBP/CHF long opportunity

                                      Heading into US session, GBP and USD are trading as the strongest one for today. CHF franc is the weakest, followed by AUD and then EUR. USD’s strength is a bit more convincing as USD/CHF has already took out last week’s high as well as key resistance level at 1.0037. EUR/USD has also just breached last week’s low. GBP/USD is kept below 1.3588 minor resistance, maintaining near term bearishness.

                                      GBP’s strength today is generally seen as corrective in near nature. Except that, EUR/GBP’s near term outlook is not overwhelmingly bullish. And, indeed, GBP/CHF is an interest cross to look at. The W row of GBP/CHF action bias showed that it was in a brief up trend. Totally neutral D row (latest 9 bars) indicates that it has been in consolidation. Some 6H red bars indicates that consolidation was in form a a pull back whether sideway trading. But as the 6H bars have turned neutral, downside momentum in the pull back has diminished. And, there are indeed a string of blue H bars, arguing that the correction could be finished and GBP/CHF is ready for rise resumption.

                                      The above could also be seen clearly, in the D, 6H and H Action Bias charts.

                                      Now back to the regular GBP/CHF bar chart. The break of 1.3600 supported turned resistance is the first sign of completion of pull back from 1.3854 at 1.3507. The structure of the fall supports that it’s a correction. And it’s also held above 38.2% retracement of 1.2861 to 1.3854 at 1.3475, which indicates healthy near term bullishness. Intraday bias is now on the upside for channel resistance (now at 1.3732). Firm break there should confirm this bullish view and send GBP/CHF through 1.3854 high to 61.8% projection from 1.2861 to 1.3854 from 1.3507 at 1.4121 as the first target. Though, break of 1.3507 will invalidate this bullish view and extend the fall from 1.3854 instead.

                                      This is the kind of setup that one can just buy at the current level at around 1.3600, with a stop at 1.3500 (below 1.3507 support), targeting 1.4121. Risk/reward ratio is good enough for position trading.

                                      ECB research: Significant increase in protectionism could have material impact on global trade and output

                                        In article titled “Implications of rising trade tensions for the global economy“, ECB researcher Lucia Quaglietti warned of the impact of escalation of trade tensions.

                                        Based on simulations carried out by ECB staff, in event of a significant increase in protectionism, “the impact on global trade and output could be material.” In particular, if US increases tariffs “markedly” on imported goods from all trading partners that “retaliate symmetrically”, the outcome for the world economy would be “clearly negative. And, “the impact could be particularly severe in the United States”

                                        For other countries, those with “closest trade relations” with the US would be most negatively affected. And, “only a few open economies with little exposure to the tariff-imposing country may benefit from trade diversion effects, as they would gain competitiveness in third markets.”

                                        In addition, the impact of trade tension escalation could be “felt via a number of channels. Higher import prices would lead to higher production costs and lower household purchasing power. Consumption, investment and employment will also be affected. Moreover, there will be economic uncertainty that leads to delay and consumer spending and business investment. Credit supply could be reduced with requirement for higher compensation. And there could be broad spill over to the global financial markets.

                                        China FX reserves dropped to five month low in USD term

                                          According to the latest data from People’s Bank of China, the country’s foreign exchange reserves dropped to a five month low in April. Reserves dropped USD 17.97B in April from USD 3.143T to USD 3.125T. In SDR terms, Foreign currency reserves rose 11.3 B from 2.162T to 2.173T.

                                          Gold reserves was unchanged at 59.24 Million oz.

                                          Total reserves dropped from USD 3.240T to USD 3.221T. In SDR terms, total reserves rose from 2.229T to 2.240T.

                                          Full official table here.