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Daily Pivots: (S1) 1.1247; (P) 1.1271; (R1) 1.1284; More...

EUR/CHF breached 1.1264 as fall from 1.1476 resumed. Intraday bias is mildly on the downside towards 1.1162 low. We'd expect strong support above there to bring rebound. On the upside, break of 1.1317 minor resistance will suggest that the pull back has completed. Intraday bias will be turned back to the upside for 1.1484 again.

In the bigger picture, at this point, we're slightly favoring the case that corrective fall from 1.2004 has completed at 1.1162 after being supported by 61.8% retracement of 1.0629 to 1.2004 at 1.1154. Decisive break of 1.1501 resistance should confirm and target 1.1713 resistance next. On the downside, firm break of 1.1154 is needed to confirm down trend resumption. Otherwise, medium term outlook will be neutral at worst.

Markets

Global core bonds lost ground yesterday with US Treasuries underperforming German Bunds. The ongoing US-Sino trade spat put investors in wait-and-see modus. Equity markets around the globe suffered, but core bonds couldn’t profit. The German yield curve bear steepened with gains up to +2.4 bps (30-yr), while the US yield curve moved higher with changes up to +3.1 bps (5-yr). Overnight, the US granted a 90-day relief for certain US companies to trade with Chinese tech company Huawei. Although the move is only a minor encore, sentiment got lifted across Asia with Chinese indices outperforming. Furthermore, comments by Fed chief Powell were insignificant and had no impact on financial markets. Global core bonds are treading water this morning. Today’s eco calendar is meagre, so the trade story will likely dominate trading again. The EMU consumer confidence for May does catch our eye and is expected to slightly recover from last month’s -7.9. Next, the OECD publishes the economic outlook and Fed heavyweights Evans and Rosengren speak.

The escalation in the US-China trade war triggered a sell-off in US and European equities yesterday. However, the fall-out on FX was modest. The yen outperformed temporary, but USD/JPY still closed just north of 110. The dollar initially also lost some ground against the euro as the US-German spread narrowed slightly, but EUR/USD swings were also contained to a tight range. EUR/USD closed the day marginally stronger at 1.1166 (from 1.1158). Overnight, sentiment on risk improved as the US government temporary eased the restrictions on Huawei. Asian equities (excl. Japan) are rebounding and so does the dollar. Fed’s Powell maintained its wait-and-see bias in a speech. He indicated it would be premature to draw conclusions from the trade talks for policy. The USD-reaction was close to non-existent. If anything , it might be a tentatively USD-supportive. Governor Lowe said the RBA will consider a rate cut at the June meeting as it could support employment growth. AUD/USD returned below 0.69. Later today, the eco calendar contains US existing home sales and the EC consumer confidence. We don’t expect a profound impact on euro or USD trading. The market focus will remain in the next scrimmages in the US-China trade war. We are not convinced that the US concessions on Huawei will already lead to a sustained easing of the session. The dollar might maintain the benefit of the doubt, but we don’t expect a big leap higher. The EUR/USD 1.1110 area remains an import support.

After a temporary breather, sterling lost further ground yesterday. UK PM May still intends to bring her withdrawal bill to Parliament. However, the conservative party remains highly divided both on the concession that can be made to the labour opposition as well as on the succession of PM May. EUR/GBP closed at 0.8776. Today, CBI order data are interesting, but markets will in the first place watch a meeting of May’s cabinet. After recent decline, sterling probably already discounts some bad news. However, as the political noise will probably persist for some time to come, we remain cautious on sterling long exposure. 0.8840 is the next higher profile EUR/GBP resistance.

News Headlines

The US Commerce Department granted a 90-day relief for certain US broadband companies and wireless customers relying on Chinese tech company Huawei for equipment. Huawei founder Zhengfei said that the US is underestimating Huwaei’s capabilities, adding that the company is prepared for such a scenario.

Thailand’s economy grew 1.0% (Q/Q) and 2.8% (Y/Y) in the first quarter, its slowest pace since 2014 as exports suffer on weaker global demand and trade tensions. GDP growth in Singapore rose to 3.8% (Q/Q) in the first quarter. Compared to a year ago, GDP rose 1.2% (Y/Y), the slowest pace in almost a decade.

EUR/USD

Current level - 1.1157

Still bearish, for a test of 1.1110, en route to 1.1015. Minor intraday resistance  lies at 1.1180.

USD/JPY

Current level - 110.15

The pullback after the initial test of 110.30 resistance was a minor one and the bias is positive, for a break beyond, towards 111.00 area.

GBP/USD

Current level - 1.2719

The downtrend remains intact, ready for a break through 1.2690, en route to 1.2580.

The EUR/USD is testing the Fibonacci retracement levels of wave D vs B again. A break below the 100% Fib level confirms a bearish breakout and downtrend whereas a bullish breakout above the resistance (red) trend line could indicate the start of the wave E (orange).

The EUR/USD pullback could be a wave B (dark red) of a larger bullish ABC (dark red) zigzag pattern in wave E (orange) of wave 4 (green) if price bounces at the Fibs of wave B vs A. A bearish breakout, however, indicates that the triangle pattern has most likely been completed.

Alphabet and some other American IT companies have suspended business with Huawei, which is one of the first examples of major consequences for a Chinese company being blacklisted by the US government. In addition, US warships cruised near disputed islands in the China Sea. Up to now, the Chinese side is limited to harsh rhetoric. Nevertheless, the last turn of the trade wars provoked a market reaction in the form of key indices decline, which returned the demand for US government bonds and defensive yen and franc.

Stocks

Technology companies stocks were under pressure on fears that the situation around Huawei would jeopardize established supply chains. The Nasdaq fell by 1.5%, futures for the S&P 500 index lose half as much, falling by 0.7%. As for the technical analysis, this is a negative signal for the S&P 500, reflecting the possible end of the rollback and increased pressure after an unsuccessful attempt to close above the MA50.

EURUSD

Since the beginning of the week, the pair fluctuated between 1.1150 and 1.1170. The decline in European currencies has stopped after growth last week. Among major data that may affect the dynamics of EURUSD, there are releases of US Existing home sales and Consumer Confidence for the euro area. A decline below 1.1100 may indicate a breakdown of an important level of support, causing more intense pressure from bears.

GBPUSD

The British currency stabilizes above 1.2700 after touching this level last Friday. The strengthened GBPUSD sale since May 6 caused a decline in the pair by 3.6%. Probably, the purchases are fuelled by news of a new attempt to get government approval of the Brexit plan. Technically, GBPUSD touched the oversold area. The ability of the pair to stay above 1.27 may cause an increase in speculative purchases after a prolonged decline.

The turn for the worse that has transpired with the unforeseen breakdown in US-China trade relations over the past two weeks has accelerated a flurry of selling momentum in the offshore Yuan. The question that continues to linger in financial market headlines following the brutalperiod of late for the Chinese currency stands as a matter of when, and not if, the offshore Yuan will weaken beyond 7 against the Greenback.

The USDCNH stands at time of writing marginally close to levels that have previously acted as the last line of defence for the Offshore Yuan; but what if authorities had a trick up their sleeves in the ongoing tit-for-tat tariffs and allowed the Yuan to freely weaken?This is a scenario that might still appear as unlikely and one that has not been priced in, but it is something that shouldn’t be ruled out following the escalation and it is a scenario that would lead to a round of shock for global investors.

Think about it from the perspective of the Chinese economy. You thought, like the majority, that a trade deal should by all accounts be concluded by end of the quarter but you now face headwinds from additional tariffs that were not expected just two weeks ago. These tariffs are serious headwinds to the Chinese economy and a threat that realistically puts a question mark on whether the 6-6.5% government target for economic growth in 2019 should be reassessed.

China will not be able to match the tariffs that the United States has put on its goods blow-for-blow and this is something that we have all been aware of since the trade tensions erupted over a year back. But, China could offset the upcoming economic pressures that the mainland economy will face in light of additional tariffs by allowing the Yuan to weaken further.

The likelihood of the trade tensions extending into the second half of the final year for the decade also highlights the potential that we should be preparing ourselves for an attempt by the Dollar Index to make another run for 100.

The steady climb in the Dollar Index over the past week or so hasn’t been documented that much, but I do think investors are hedging on the Greenback in anticipation of the trade conflict between the United States and China potentially extending into 2020. 100 in the Dollar Index would be a painful migraine for all currencies in the developing world, one which would make the second half of 2019 a troublesome end to the decade for emerging market currencies.

An advance towards 100 in the Dollar Index would stand as the final nail in the coffin for even the most doubtful of spectators that the offshore Yuan would not be allowed to weaken beyond 7. It would also marginalise buying demand for emerging markets at a time where they have not yet adapted to the incoming external headwinds, with restricted buying demand for emerging markets causing pain for currencies stretching from the Malaysian Ringgit to the South African Rand and even as far as the Brazilian Real.

Upcoming European elections to signal another push for right-wing in Europe; swing lower in Euro ahead?

The Euro has opened yet another week with low volatility as traders brace themselves for the upcoming European Parliamentary elections. Things have been quiet for Euro volatility in the FX space for a very long time, and one must wonder whether the upcoming elections could be what the doctor ordered to inject some life back into a Eurodollar that has been asleep for most of the past year.

I am going to take the contrarian view and look at the upcoming European elections as the warning lights that risk the Euro falling to 1.10 for the first time since May 2017. The recent history of European politics suggests that the elections will signal more power moving towards far-right political parties and this isn’t something that investors will be able to ignore forever.

If the European elections do threaten the stability of the European Union, a great deal of concerning views on the outlook of the Euro can even lead to the discussion over Eurodollar parity making their way again.

General Trend:

• Chinese equities rise in early trading, on track for first gain in 3 sessions
• Japanese chipmakers underperform amid focus on Huawei, Chinese chipmakers and Samsung however outperform
• Chinese rare-earth companies rise on speculated import restrictions
• Chinese smartphone maker Xiaomi rises less than 2% following earnings report
• Softbank rises in Japan on hopes that Sprint/T-Mobile merger is approved
• Australia financial sector rises after regulator (APRA) moves to ease mortgage rules , continued momentum after surprise election results
• Woolworth’s declines in Australia amid cautious broker commentary
• Australian building materials firm James Hardie (exposed to US housing market) rises after results and guidance
• RBA Gov Lowe signals possibility for June rate cut
• Big three Aussie banks now all call for June rate cut
• Aussie yields remain above recent lows despite comments by Lowe
• Some analysts examine if mortgage-related move by APRA will ease some of the rate cut pressure on the RBA
• Lowe: Move by APRA would complement, not substitute, monetary policy
• China PBoC injected liquidity for the first time in 7 sessions
• USD/CNH remains below 6.95 amid stability pledges out of China
• Chinese bond yields rise as domestic equities and yuan gain
• Chinese soymeal futures decline over 1.5% in the face of lingering trade worries
• South Korea chip exports continued decline during first 20 days of May
• US Fed Chair Powell did not comment directly on monetary policy, mentioned CLOs and leveraged loans
• Singapore cut top end of 2019 GDP growth target range after mixed final Q1 GDP data; cut forecast for non-oil exports
• Thailand cut 2019 growth forecast amid expectation for weaker exports
• Technology companies react to temporary reprieve given to Huawei by US gov’t; Huawei itself plays down the importance of the move

Headlines/Economic Data

Australia/New Zealand

• ASX 200 opened +0.1%
• (AU) RESERVE BANK OF AUSTRALIA (RBA) MAY MINUTES:OUTLOOK WOULD THUS BE LESS FAVOURABLE WITHOUT AN EASING IN POLICY OVER NEXT 6 MONTHS (replacing prior wording of not a strong case for near term adjustment In monetary policy)
• (AU) RBA GOV LOWE SPEECH IN BRISBANE: BOARD WILL CONSIDER CASE FOR RATE CUT IN JUNE
• JHX.AU Reports FY19 Net $228.8M v $146.1M y/y; adj Op $300.5M v $301Me; Rev $2.51B v $2.05B y/y
• (AU) APRA: Proposes to amend guidance on mortgages, proposes removing the minimum 7% mortgage rate buffer
• (AU) Australia Treasurer Frydenberg: Tax cuts will be delivered as soon as passed by parliament; affirms budget surplus target

Japan

• Nikkei 225 opened -0.4%
• 8028.JP Suing to dissolve 15 year JV partnership with Ting Hsin Food Conglomerate - Nikkei
• 8306.JP Mitsubishi UFJ Financial group reportedly reducing MUFG Bank branches by 35% by FY23 (had prior plans to close 20%) – Nikkei
• (JP) Japan Fin Min Aso: GDP at 2.1% and two quarters of growth "is not bad"; fundamentals continue to be firm
• (JP) Japan Q1 Housing Loans Y/Y: 2.4% v 2.4% prior
• (JP) Japan Econ Min Motegi: Japan and the US will hold working level trade talks today; no decision on Lighthizer talks ahead of Trump's visit
• (JP) Bank of Japan (BOJ) Gov Kuroda: Bond buying is to reach price target, no finance Govt debt
• 6758.JP CEO Yoshida announces mid-term corporate strategy for FY19-21: planning to increase FY20 CAPEX to ¥1.1-1.2T, to stably raise dividend over the long term, want to buyback in an agile manner

Korea

• Kospi opened +0.1%
• (KR) South Korea Apr PPI Y/Y: 0.6% v 0.5% prior (2nd consecutive increase)
• (KR) Bank of Korea (BOK) Gov Lee: Not considering currency redenomination; BOK steps to cap won decline not a problem – Yonhap (overnight)
• (KR) South Korea May 1-20th Exports y/y: -11.7% v -8.7% prior; Imports y/y: -0.1% v -1.2% prior; Chip exports -33% y/y; Car exports +12.6% y/y
• 005490.KR US will further reduce tariff on cold rolled steel - Yonhap

China/Hong Kong

• Hang Seng opened -0.4%; Shanghai Composite opened -0.1%
• (CN) Reportedly China to suspend business with all suppliers who agreed to halt supplying Huawei; may temporarily hike tariffs for Apple; All China trade talks with U.S. said to be halted - Money China twitter (after the close yesterday)
• (CN) US Commerce Dept: confirms plans in filing to revise 'entity list' restrictions on Huawei so existing customers can maintain networks
• Huawei Founder Ren: Won't rule out use of US chips, 90-day license [issued by US] does not make much sense for Huawei; Infineon has not stopped supplying chips to Huawei (refutes recent press report) - Chinese Media
• (CN) China PBoC Open Market Operation (OMO): Injects CNY70B in 7-day reverse repos v skips prior: Net: CNY80B v CNY0B prior (1st injection after 6 skips)
• 1913.HK Starts strategic review on wholesale channels, considers it essential to ensure greater consistency in pricing policies across retail and digital channels
• (CN) Not a large chance for the yuan to experience disorderly devaluation, necessary to make counter cyclical adjustments of yuan; Risk of 'over-depreciation' of yuan (CNY) are emerging over the short-term - China Securities Journal Front Page Commentary
• (CN) China is using $25T in equity stakes in state-owned enterprises (SOE) to address pension hole – SCMP
• (CN) China PBoC sets yuan reference rate: 6.8990 v 6.8988 prior
• (CN) China said to have extended ban on imports of medium to heavy rare earths, including dysprosium oxide and terbium oxide, from Myanmar; raised rare earth import tariffs from the US to 25% from 10% - Chinese press

Other Asia

• (SG) Singapore Q1 Final GDP Q/Q: 3.8% v 2.3%e; Y/Y: 1.2% v 1.4%e; Cuts 2019 GDP estimated range: 1.5-2.5% (prior 1.5-3.5%)
• (TH) Thailand Q1 GDP Q/Q: 1.0% v 1.3%e; Y/Y: 2.8% (slowest pace in 4-yrs) v 2.8%e
• (SG) Monetary Authority of Singapore (MAS): Current monetary policy stance is appropriate; expects inflation pressures to be stable this year

North America

• (US) Fed Chair Powell: No direct comments on interest rates; Sees business lending risk as moderate; job creation is strong and wages are rising in context of muted inflation pressures - Speech on assessing risks to the financial system
• (US) Fed's Clarida (moderate, voter): Full employment may go at least as low as 3.6%; labor market may not be operating beyond full employment (US session)

Europe

• (IR) Iran President Rouhani: In favor of talks and diplomacy, but under current conditions do not accept

Levels as of 1:20 ET

• Nikkei 225, -0.3%, ASX 200 +0.2%, Hang Seng -0.1%; Shanghai Composite +1.4%; Kospi +0.7%
• Equity Futures: S&P500 +0.4%; Nasdaq100 +0.5%, Dax +0.1%; FTSE100 +0.3%
• EUR 1.1173-1.1162 ; JPY 110.26-110.01 ; AUD 0.6929-0.6885 ;NZD 0.6544-0.6517
• Gold -0.2% at $1,275/oz; Crude Oil +0.4% at $63.45/brl; Copper +0.4% at $2.740/lb

Market movers today

In light of another day of only tier-2 data releases, political headlines - be it the US-China trade spat or Brexit - will remain in focus today. In the UK, PM Theresa May will convene a cabinet meeting today to consider how to respond to the collapse of the cross-party talks with Labour.

In the Euro area, consumer confidence data for May is on the agenda. Domestic demand, especially private consumption, was an important growth driver in Q1 as consumer sentiment recovered some ground after the H2 18 weakness. We will look for any signs that this trend might go into reverse amid the latest trade war escalation.

Central bankers will also be on the wires today, with ECB Vice President De Guindos speaking in London and the Fed's Evans and Rosengren discussing the economy and monetary policy.

Overnight to Wednesday, Japanese export figures for April are due out and will shed some light on where the Japanese export sector is heading after the surprisingly strong Q1 GDP figures released yesterday.

Selected market news

The equity market used yesterday to digest the news over the weekend that the White House has blacklisted Huawei. In the stock market, in particular semiconductor producers - the trade war/Huawei proxy - came under pressure with, for example, Intel falling to the lowest level in 2019. But the day started out on more positive footing in Europe with better-than-expected Japanese GDP, a victory for the market-friendly liberal-national government in Australia, talks about a Japan-US trade agreement and President Trump's talk over the weekend that they "had a deal" but "they [China] changed it". But the mood changed as later in the day Chinese Foreign Ministry spokesman Lu Kang denied that China had agreed to anything. He said, "We don't know what this agreement is the United States is talking about. Perhaps the United States has an agreement they all along had extravagant expectations for, but it's certainly not a so-called agreement that China agreed to."

Overnight, it is noteworthy that the Chinese central bank once again injected cash into the system. The central bank offered 80b yuan of seven-day funding, the biggest single-day injection in more than a month. It has fuelled hopes that the Chinese will stimulate the economy further and Chinese stocks are close to 2% higher this morning and both European and US equity futures are pointing higher. A 90-day waiver granted for certain US broadband companies using Huawei equipment might have also helped sentiment. Google will also be able to provide key Android mobile updates for 90 days.

The market is also looking to the Fed for help, but so far the Fed has been reluctant to soften its stance further in the wake of the ongoing trade concerns. Overnight, Powell repeated this view, saying that the outcome of the trade negotiations is highly uncertain and that it would be premature to make a judgement. The market is priced for approximately two Fed rate cuts of 25bp over the next 12 months.

Daily Pivots: (S1) 1.1152; (P) 1.1164; (R1) 1.1176; More.....

Despite diminishing downside momentum, intraday bias in EUR/USD remains on the downside for retesting 1.1111. Firm break there will resume larger down trend for 100% projection of 1.1448 to 1.1183 from 1.1324 at 1.1059. Though, on the upside, above 1.1224 minor resistance will turn bias back to the upside to extend the consolidation from 1.1111 first.

In the bigger picture, down trend from 1.2555 (2018 high) is still in progress. Such decline would target 78.6% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.0813 next. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1448 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

For the 24 hours to 23:00 GMT, the EUR rose 0.05% against the USD and closed at 1.1168.

In economic news, the Euro-zone's seasonally adjusted current account surplus unexpectedly narrowed to €24.7 billion in March, compared to a revised surplus of €27.8 billion in the previous month.

Separately, in Germany, the producer price index (PPI) rose 2.5% on an annual basis in April, surpassing market consensus for a rise of 2.4%. The PPI had recorded an advance of 2.4% in the previous month.

In the US, data showed that the Chicago Fed national activity index fell to a level of -0.5 in April, citing decline in factory output and higher than market anticipations for a drop to a level of -0.2. In the prior month, the index had registered a revised level of 0.1.

The US Federal Reserve Chairman, Jerome Powell, warned over the rising levels of business debt. However, he stated that it does not pose a larger threat to the financial system and considers the risks to be “moderate”.

In the Asian session, at GMT0300, the pair is trading at 1.1165, with the EUR trading slightly lower against the USD from yesterday's close.

The pair is expected to find support at 1.1152, and a fall through could take it to the next support level of 1.1140. The pair is expected to find its first resistance at 1.1176, and a rise through could take it to the next resistance level of 1.1188.

Looking ahead, traders would await the Euro-zone's consumer confidence index for May, along with the OECD economic outlook, scheduled to release in a few hours. Later in the day, the US existing home sales for April, will be on investors radar.

The currency pair is showing convergence with its 20 Hr and 50 Hr moving averages.