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The Canadian dollar rose 1.03 percent in the last five trading sessions. The loonie is trading at 1.3085 after monthly GDP data was higher than forecasted at 0.3 percent and the Bank of Canada (BoC) business outlook survey showed companies were optimistic about sales growth in the second half of the year. The main challenge facing the Canadian economy is the possible slowdown of its biggest trading partner: the United States.

The loonie is not immune to trade concerns, but this year it has been boosted by trade developments as the USMCA, which replaces NAFTA, is on its way to being ratified by all three members.

The Bank of Canada (BoC) is not expected to cut rates as soon as other major central banks given the positive indicators of late, but it is not out of the woods yet.

Central Bank Rate Cuts and US Employment Ahead

The US dollar is mixed against major pairs at the end of trading on Friday. Commodity currencies lead the charge with the New Zealand dollar almost 2 percent up on the greenback. The Canadian dollar rose 1 percent as strong economic indicators play down the probability of an interest rate cut. The Fed clipped the dollar’s wings by signalling an upcoming benchmark rate cut.

Global stock markets were flat in anticipation of what the G20 meeting would bring. A side meeting that was not part of the official agenda between China and the US was the most awaited moment.

Markets will look forward to an action packed first week of July. The Organization of the Petroleum Exporting Countries (OPEC) will meet with major producers this week to decide the fate of their production cut agreement. Manufacturing data in China and the US will not show any impact from the G20 meeting, but the indicator could change drastically going forward. The Reserve Bank of Australia (RBA) could slash its rate to 1 percent as the central bank is part of the dovish choir of monetary policy makers that are back to their easing ways.

The week wraps up with the release of the U.S. non farm payrolls (NFP) on Friday. US jobs are expected to bounce back after the disappointing March report that showed only a gain of 75,000. A range form 150,000 to 210,000 is forecasted with a bump in average hourly earning up to 0.3 percent.

Oil finished the week mixed with West Texas Intermediate rising 1 percent but Brent losing 1.53 percent. Trade uncertainty before the weekend added volatility to energy pricing. It was the main reason the OPEC and the other major producers pushed back their ministerial meeting to this week. Russia remains on the sidelines and seems only a big drop in oil prices would expedite an extension of the agreement to cut production to stabilize prices.

Crude prices have been pressured downward as the trade war between US-China was a negative factor on energy demand. Supply disruptions added support to prices, but the major factor was the OPEC+ which is why if Russia does not agree to an extension the initiate could be too much for Saudi Arabia to handle by itself.

Gold rose 0.97 percent as the yellow metal is back on top as the favourite destination for investors seeking refuge from uncertainty. The willingness to cut rates from the Fed is keeping the dollar weak and gives the gold the upper hand as July gets underway. The market is pricing in a rate cut to be announced at the July Federal Open Market Committee (FOMC) that will put more downward pressure on the dollar.

Middle East tensions and the ongoing Brexit debate will be in the spotlight in July making a strong case for gold climbing higher as major central banks run back their easing monetary policy playbook.

• The BOS indicator popped into positive territory in Q2
• Future sales expectations improved
• Capacity pressures increased though still down from 2018

The Q2 Business Outlook Survey showed a modest improvement in business sentiment, which was about the best we could have hoped for given rising trade tensions during the survey period. Firms expect global trade headwinds and uncertainty will restrain their exports, though they still see foreign sales picking up modestly. More businesses think capacity pressures (which partially rebounded in Q2) and domestic regulations are holding back their sales than trade policy. Domestic demand is expected to remain supportive, with some help from improving housing activity (a key headwind cited in Q1). Weakness in the energy industry is expected to persist, though this morning’s GDP figures show the drag from that sector is easing.

Our worry was that growing external headwinds would more than offset some easing in domestic pressures. That doesn’t appear to be the case, with overall sentiment sitting slightly above its long-term average in Q2. Investment and hiring intentions were little changed from Q1—down from last year, but holding slightly above longer-run averages. So while the BoC is likely to express concern about rising trade tensions, today’s Business Outlook Survey and GDP report give Governing Council plenty of reason to be less dovish than the Fed.

The manufacturing sector is remarkably important for the America’s technology and innovation leadership but also for the jobs market and thus any negative warning about the sector is a headwind to the economy and consequently to the dollar. The problem today is that the import tariff barriers imposed by the US government to China and other key economies have opened a can of worms in the industry, persuading the Fed to pause its rate hike campaign this year. On Monday at 1400 GMT, the closely watched survey of the Institute of Supply Management will likely (ISM) show that conditions deteriorated even further in June.

Following a disappointing reading in May, the ISM Manufacturing PMI reading is expected to be more bitter in June, with the index seen falling from 52.1 to 51.5, the lowest mark registered since October 2016. Such news, however, may not be very surprising to markets as the preliminary IHS Markit Manufacturing PMI for the month of June, has already warned investors about another slowdown, with the index falling to 50.1, closer to the 50 threshold that separates expansion from contraction.

A miss in forecasts could normally raise stakes for a rate cut as soon as July and weigh on the dollar on speculation the trade war could cut growth more sharply in the second quarter. The two-day G20 summit however that kicks off today in Osaka could change market sentiment early next week and hence alleviate the data impact on the currency. Even though the media has given little hope over a constructive meeting between Trump and Xi Jinping, a positive outcome could potentially postpone another exchange of tariffs and put the sides back on the discussion table. In this case, a weaker-than-expected ISM manufacturing PMI could have a softer negative impact on market rate projections and therefore on the greenback. Otherwise, should the talks prove fruitless, with China refusing to step back on key principles and the US unleashing new tariff hikes, the Fed may not wait long to slash rates if the data next week disappoint.

Resistance to watch for USDJPY could be the 108.20-108.73 area if the G20 summit eases concerns over a more aggressive trade war, reducing exposures to safe-haven assets. On the flip side, a combination of discouraging trade headlines and downbeat data could send the pair down to the 107.40-107.20 zone, while a deeper decline may also retest support within the 107-106.80 region.

It’s another action-packed week, with the pivotal G20 summit that will decide how risk sentiment develops, finally upon us. Elsewhere, the Reserve Bank of Australia (RBA) is expected to slash rates again, while oil traders will pay close attention to the OPEC meeting. Economic data are not in short supply either, with the US employment report likely to add the final touches to expectations around how deep the Fed will cut in July.

Trump-Xi meeting at G20 paramount for risk appetite

Despite being the epicenter of attention for a while now, the meeting between the American and Chinese leaders hasn’t happened yet – it’s scheduled for Saturday. Thus, markets will probably open with gaps on Monday. Traders hope that Trump and Xi can sort out some of their differences on trade, allowing formal negotiations to resume soon.

On the margin, that does seem like the most likely outcome. Trump wants more talks, something made clear by him calling Xi recently, and China is unlikely to refuse. Even if the two sides remain far apart on key issues, they still have an incentive to portray a positive picture, for fear of damaging business sentiment in their respective home economies if they don’t.

Should the two leaders indeed agree to restart negotiations, stocks would likely be the biggest winner alongside commodity currencies like the aussie and kiwi. Meanwhile, safe havens such as the Japanese yen and gold could give back some of their latest gains.

The risk is that Trump – feeling he has more negotiating leverage with US stocks back at record highs – decides to play more ‘hardball’ and sticks to demands that Xi finds unreasonable. In this case, stocks could drop while haven assets grind higher.

US payrolls & PMIs crucial for how deep the Fed will cut in July

In the US, the week kicks off with the ISM manufacturing PMI for June on Monday. The non-manufacturing survey follows on Wednesday along with the private ADP jobs figures for the same month, culminating with the official employment data on Friday. Forecasts point to a solid report, with nonfarm payrolls expected at 165k, the unemployment rate steady at 3.6%, and a slight acceleration in average hourly earnings.

Since these will be among the final major releases before the Fed’s July policy meeting, they will be crucial in setting expectations for that event. The Fed has essentially locked itself in for a rate cut then – the question is whether it will slash rates by a typical 25 basis points (bps) or whether it will ‘shock’ markets with a more aggressive 50bps cut.

Barring a major disappointment in incoming data, a 50bps move seems a little excessive, as even one of the most dovish FOMC members – James Bullard – pointed out lately. Markets still assign a ~25% probability for a 50bps cut, so the dollar has some room to recover in the next weeks as this is priced out. Overall though, the outlook for the greenback isn’t bright. The Fed has a lot more ‘firepower’ to ease than other major central banks, meaning that the dollar’s potential downside in a prolonged global easing cycle would likely be greater than its peers.

American markets will remain closed on Thursday for Independence Day.

RBA projected to slash rates again

Both economists and markets believe the RBA will cut rates for a second consecutive time when it meets early on Tuesday, with market pricing assigning a 75% probability for such an action. This number jumped lately after Governor Lowe noted that the latest cut by itself would probably not be enough to support the economy.

Despite recent data not being horrible, investors are convinced the RBA will act with force. Perhaps the biggest argument for acting again so soon is the exchange rate. If the Bank doesn’t cut now, then the aussie could surge, especially if the trade signals from the G20 are optimistic. A stronger currency makes it more difficult for inflation to rise, so the RBA likely wants to avoid that route.

While the aussie may drop on a potential rate cut, much of its broader direction will also depend on trade. In other words, a lot of RBA easing is already priced in, and given that the Fed is now also ready to loosen along with other major central banks, monetary policy is not a clear negative force for the aussie anymore. Trade may therefore play an even bigger role in driving the currency moving forward.

Governor Lowe will speak a few hours after the decision, while the nation’s retail sales for May are due on Thursday.

OPEC and allies meet to extend production cuts

It will be a pivotal week for the oil market too. Not only will the G20 outcome shape the demand outlook, but the supply picture will also be updated when OPEC and its allies meet on Monday and Tuesday. The main question is whether these producers will extend their output cuts, and if so, for how long.

Judging by recent comments from the various energy ministers, a 6-month extension seems like a near certainty. This implies that for oil prices to rise materially from here, the cartel needs to deliver something over and above what markets already expect, for instance a one-year extension or deeper production cuts – or both.

Canadian jobs data on tap as loonie prepares to fly

The yen and the franc may have gotten all the attention lately, but the loonie has also been shining. Canadian economic data are solid, in contrast to most of the world, which puts the Bank of Canada (BoC) in the odd situation of being almost the only major central bank not preparing to cut rates.

Hence, the employment data for June that are due on Friday could be the catalyst for even more gains in the loonie, if they confirm the narrative that the BoC will be an ‘island of neutrality’ as others ease. Before that though, the oil-linked currency will also be sensitive to how the G20 and OPEC meetings play out.

UK PMIs unlikely to distract markets from Brexit

The British pound has recovered some ground lately, partly due to a more conciliatory tone on Brexit by the two candidates aiming to become Prime Minister, and partly due to broad dollar weakness.

In the economic realm, the PMI surveys for June will be released on Monday, Tuesday, and Wednesday for the respective manufacturing, construction, and service sectors – but as usual the currency will probably respond mainly to politics. In that sense, all eyes remain on the Tory leadership race, where Boris Johnson is leading by a wide margin.

Chinese & Japanese business surveys to gauge health of global economy

In China, the PMIs for June will be in focus. The official surveys will be released over the weekend, while the private Caixin figures are due early on Monday and Wednesday for the manufacturing and service sectors, respectively. Admittedly, with the trade war escalating recently, the risks surrounding these numbers seem tilted towards a decline. In such case, global risk appetite could take a hit.

In Japan, the quarterly Tankan survey for Q2 is due on Monday. Forecasts point to a drop in business confidence, which likely reflects trade worries. Regardless, the yen doesn’t typically react to economic data and will therefore take its cue mainly from changes in risk sentiment, given its haven status.

Overall, the outlook for the Japanese currency is improving. Besides risk aversion making a comeback, foreign central banks are also preparing to ease. That could continue to narrow the relative rate differentials between Japan and the rest of the world, making the yen more attractive by comparison.

• A ceasefire tomorrow is widely expected but the path to a trade deal is likely to be rocky. Renewed escalation in H2 is still a risk if both sides stand firm.
• Markets are caught between the threat of escalation and belief in a trade deal.
• There are still no signs of a hard landing in China, with profits rising 1.1% y/y in May.

Note: China Weekly Letter is taking a break in July. Have a great summer.

Xi and Trump to restart talks but no quick fixes

A delay in additional tariffs on China is now widely expected. According to media reports, the US and China tentatively agreed to a trade war truce in the meetings conducted by US Chief negotiator Robert Lighthizer and China's Vice Premier Liu He ahead of G20.

According to some sources, Chinese president Xi Jinping demanded Donald Trump delay the tariff increases as a condition of holding the meeting. In addition, The Wall Street J ournal reported that Xi will demand the removal of Huawei from the blacklist as a condition of a trade truce. On Friday, a foreign ministry spokesperson repeated the message that China hoped the US would meet China halfway in the trade talks. China has also noticed that the trade war is unpopular among US businesses. The international state media China Daily wrote on Friday that 96% of 314 business representatives stated their opposition to additional tariffs on China during last week's hearings.

However, Reuters reported earlier this week that the US will not come with concessions to the talks. Instead, it wants China to go back to the deal that was on the table before the breakdown of talks. In an interview with Fox News, Trump said that unless China was able to get talks back on track, he was ready to go ahead with the so-called phase 2 and put tariffs on another USD300bn worth of goods. He could start with 10%, he said.

The Xi-Trump meeting is scheduled to take place on Saturday at 11:30 local time, corresponding to 04;30 CEST . The plan is for the meeting to last 90 minutes.

Comment: While a ceasefire seems highly likely, we expect the path to a deal to be difficult. The mood up to this G20 meeting has been much worse than prior to the previous G20 meeting and both sides continue to stand firm.

We should have statements from both sides on Saturday morning European time. Some of the things to look out for are (a) will tariffs be delayed?, (b) will Trump put a deadline on a deal before lifting tariffs?, (c) if so, will he put the tariff rate at 10% or 25% and (d) will the blacklisting of Huawei be removed? We expect a delay in tariffs but believe that Trump will set a deadline for a deal, possibly three months as he did previously. We also expect the blacklisting of Huawei to be removed . Otherwise, China might retaliate through restrictions on rare earth exports to the US . If we fail to get a ceasefire, then we expect uncertainty to increase sharply again and then we believe we would be in for a sell-off in equity markets.

Financial markets too complacent

As a ceasefire started to look increasingly likely, equity markets have rebounded in the month of June. However, as the 'good news' was priced in, stocks traded with more hesitance this week – not least because the signals from both sides have shown little sign of softening. The CNY has shown the same pattern. Following the initial sell-off after the trade war escalation in early May, the CNY regained a bit of the lost terrain. This week FX markets have treaded water awaiting the signals from G20.

Comment: Equity markets seem caught between on the one hand a risk of further escalation, which would spell renewed sell-off, and on the other a belief that a trade deal will come eventually, leading to a stock market rally.

However, we have one concern when it comes to the short-term stock market outlook. Equity prices seem to be complacent about the risk of a further escalation, which could push both the global economy and the Chinese economy into an even deeper slowdown. If Trump gets impatient and there is no real market pressure to make the necessary compromise, he might hit the tariff button once again to pressure China even harder. This in turn could result in Chinese retaliation involving restrictions on rare earth minerals and a US consumer boycott is looming in the background in the event of further escalation.

Thus, we see a higher risk that equity markets have to go lower before they go higher again, as the pressure from a market sell-off may be necessary to push Trump into making the necessary compromise to strike a deal.

The same pattern holds for our outlook for USD/CNY. We expect USD/CNY to move higher still before the parties eventually strike a deal and USD/CNY turns lower again.

Still no signs of a hard landing in China

The economic news was limited this week. Industrial profits for May rose 1.1% y/y after a 3.7% fall in April. This is broadly in line with other data, which point to weak growth but not a hard landing. Metal markets suggest this picture is intact in the short term (see chart).

Comment: We expect China's economy to stay soft but avoid a hard landing. Chinese authorities are ready to ease policy more if there are any signs the economy is deteriorating further. Taxes have already been cut and lending measures to the private sector been implemented. Rules for local government bond issuance have also been loosened to allow more infrastructure projects to go ahead. Next week, PMIs for June will provide more information on the state of the economy. We look for a big decline in Caixin PMI manufacturing, which seemed 'too strong' compared with NBS PMI manufacturing, which fell sharply. We expect the latter to be broadly unchanged.

Other China news over the past week

• US expands blacklist to super computers and AMD partners.
• Micron resumes some chip shipments to Huawei.
• Singapore's Prime Minister calls for united ASEAN amid US-China tensions.
• Vietnam and India see an explosion in FDI from China as production moves.

Market movers ahead

• The most important global event is the Donald Trump-Xi Jinping meeting in Japan this weekend - in our view, there is hope for an easing of the trade war.
• The US jobs report and ISM data could point to a further economic slowdown in June; jobs growth is especially important to watch at this time.
• A new attempt to agree on the EU top jobs will be the central point of an extraordinary EU summit on Sunday.
• PMI data from China could be weak, as could the important Japanese Tankan survey.
• Following the dovish shift from the major central banks, the Swedish Riksbank is under pressure to send new signals at its meeting on Tuesday.

Weekly wrap-up

• The global macroeconomic situation remains weak.
• The Fed and ECB gave further hints about their potential monetary policy easing.
• There are further indications of a possible trade ceasefire between China and the US.
• Tensions between the US and Iran continue to run high.
• Import prices continue to rise in Sweden, but consumer prices do not.

Full report in PDF.

Markets

Global core bonds tread water today with German Bunds marginally outperforming US Treasuries during a rather dull trading session. Neither EMU June inflation (1.20% YoY) nor US May PCE (1.50% YoY) were able to trigger a notable market reaction, despite core measures (resp. 1.1%, 1.60% YoY) printing slightly higher than expected. Today’s narrow range trading clearly shows markets are sidelined for tomorrow’s closely watched Trump-Xi meeting. President Trump said he’s preparing for ‘productive’ talks with his Chinese counterpart, in one breath adding however that he didn’t promise to hold off on new tariffs. US yields add no more than 1 to 1.5 bp across the curve. The German yield curve flattens with a small yield decline at the long end of the curve (30-yr: -1 bp) and other maturities unchanged. Peripheral spreads mostly narrow with Italy outperforming (-4 bps) as investors took heart from positive headlines related to the ongoing disciplinary procedure.

The story on global (FX) trading was similar to yesterday. Investors refrained from holding big directional positions ahead of key events expected to take place at the G20 in Osaka tomorrow. Order-driven trade prevailed. Last minute end of month positioning was also in play. EUR/USD jumped higher in the 1.13 big figure early in European dealings. We didn’t see any specific news. The pair filled offers in the high 1.13 area but a real test of 1.1400 again didn’t occur. EMU June inflation was marginally above consensus but as expected didn’t change expectations for ECB policy. The euro declined and the dollar captured a better bid going into the start of US dealings, but the move again didn’t go far. US May spending and income data were solid, but the price deflators were close to expectations. The dollar didn’t react, another indication that technical considerations prevailed for USD trading, rather than eco or other news. EUR/USD is trading in the 1.1380 area. USD/JPY hovers near 107.80. Regarding the G20 meeting, a constructive outcome of the Trump-Xi meeting tomorrow might be moderately positive for the dollar (higher US yields). Especially USD/JPY might profit. The impact for EUR/USD might be more neutral. At the same time, we will look out for comments from president Trump on the US FX policy/strength of the dollar.

EUR/GBP again touched a minor correction top just below the 0.90 level. However, this psychological barrier was still left intact. The move mirrored a similar rebound, but some sterling weakness was maybe also in play as Boris Johnson didn’t rule out suspending Parliament to keep the option of a no-deal Brexit open. Press articles indicated that Boris Johnson is preparing a (stimulating) budget including tax cuts to support the economy in case of a no-deal Brexit. Such fiscal support is in theory sterling supportive, but we doubt this consideration was in play for trading today. EUR/GBP is trading in the 0.8960 area.

News Headlines

The Belgian National Bank decided to raise the countercyclical buffer rate for credit risk exposure to 0.5% as the credit-to-GDP gap reached 2.1% in 2019Q1, exceeding the 2% threshold. The decision will become binding as from July 1st 2020 and is estimated to result in an additional capital buffer of approximately € 1 bn.

The OECD Secretary-General Gurria warned that central banks “have run out of ammunition”. He said that current very low interest rates will remain lower for longer, pointing out that is as much as central banks can do. Countries that have room to do so, should use fiscal policy to boost the economy.

The pair dipped to new multi-month low at 1.3068 (also low of 1 Feb) on Friday, following stronger than expected Canada's GDP (Apr 0.3% m/m vs 0.1% f/c) which additionally boosted the loonie. The pair holds in steep descend for the past two weeks, as greenback was pressured by rising expectations for Fed rate cut, while Canadian dollar was additionally inflated by upbeat CPI and solid GDP data. Bears tested 1 Feb trough at 1.3068 which lays just above another pivotal support at 1.3052 (Fibo 38.2% of 1.2061/1.3664 ascend. Firm break of these levels would spark further weakness for test of next significant supports at 1.3000/1.2956 (psychological/weekly cloud base). The pair is on track for the second straight strong weekly loss that adds to negative outlook, however, flat momentum and oversold stochastic warn that bears may take a breather before resuming. Corrective upticks are expected to hold below falling 10SMA (1.3214) and keep larger bears intact. The markets are awaiting the outcome of Trump/Xi meeting, as the most important event this week, for fresh signals.

Res: 1.3100; 1.3137; 1.3185; 1.3214
Sup: 1.3068; 1.3052; 1.3000; 1.2956

Daily Pivots: (S1) 107.57; (P) 107.87; (R1) 108.08; More...

Intraday bias in USD/JPY remains neutral at this point. In case of another recovery, upside should be limited by 108.80 resistance to bring fall resumption. On the downside, break of 106.78 minor support will extend the decline from 112.40 to retest 104.69 low. However, firm break of 108.80 will indicate short term bottoming and turn bias to the upside for 110.67 resistance instead.

In the bigger picture, decline from 118.65 (Dec 2016) is still in progress, with the pair staying inside long term falling channel. Break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51. For now, we'd expect strong support above 98.97 (2016 low) to contain downside to bring rebound.

Daily Pivots: (S1) 0.9745; (P) 0.9780; (R1) 0.9801; More...

Intraday bias in USD/CHF remains neutral for the moment. In case of another recovery, upside should be limited by 0.9854 support turned resistance to bring fall resumption. On the downside, break of 0.9695 will resume the fall from 1.0237 to 0.9587 fibonacci level. Nevertheless, break of 0.9854 will indicate short term bottoming and target 1.0014 resistance instead.

In the bigger picture, current development confirms that up trend from 0.9186 (2018 low) has completed at 1.0237 already. With 38.2% retracement of 0.9186 to 1.0237 at 0.9836 taken out, deeper fall should be seen to 61.8% retracement at 0.9587 and below. We'd pay attention to bottoming signal below 0.9587.