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At this point, it's unsure how China will respond to renewed tariff threats by Trump at this "very last" stage of negotiations. Vice Premier Liu He is originally scheduled to travel to Washington on Wednesday to wrap up the trade deal. It's reported that Trump's erractic change in position shocked Chinese officials. but so far there is no decision made on whether to cancel Liu's trip or even cancel all trade negotiations.

At the same time the PBoC announced to lower the Reserve Requirement Ratio for small to medium banks starting next Wednesday on May 15. The move is expected to to release CNY 280B in long-term funds to the markets.

Chinese Yuan tumbles sharply today in reaction to all the news collectively. USD/CNH (off-shore Yuan) hits as high as 6.8214 after gapping up. Technically, the development suggests that pull back from 6.9800 (2018 high) has completed at 6.6699, after hitting 38.2% retracement of 6.2354 to 6.9800 at 6.6956. It's a bit early to say, but 7 handle in USD/CHN could be at risk again if trade tensions worsen further.

Trump's move to escalate trade war with China got full support from Democrat Senate leader Chuck Schumer. Schumer urged Trump to "hang tough on China" in a tweet" and "don't back down". He added "strength is the only way to win with China".

https://twitter.com/SenSchumer/status/1125143336837206016

White House economic adviser Larry Kudlow tried to tone down the threat and said trump is merely "issuing a warning here". He told Fox News that " we bent over backwards earlier, we suspended the 25 percent tariff to 10 and then we’ve left it there. That may not be forever if the talks don’t work out"

However, an informal trade adviser to Trump, Michael Pillsbury, clearly disagreed with Kudlow. He said “I take the president’s tweet at face value. I was disappointed that Larry Kudlow downgraded it to a mere warning, which may tend to undermine American credibility as the Chinese delegation prepares its position”.

It's unsure for now whether Trump is really intending to drop the negotiations abruptly. Or, he's just trying to push China for last minute concessions on some key issues. But the act could firstly undermine credibility of the US in negotiations with other countries. And, it could also undermine Trump's own credibility as he's told the public numerous times that a deal was close.

According to the CFTC Commitments of Traders report for the week ended April 30,  NET LENGTH for crude oil futures plunged -23 256 contracts to 524 103 for the week. Speculative long positions fell -6 372 contracts while shorts rose +16 884. For refined oil products, NET LENGTH for gasoline gained +1 441 contracts to 97 718, while NET SHORT  for heating oil fell -2 118 contracts to 12 670 contracts for the week. NET SHORT for natural gas futures jumped +14 053 contracts to 69 129 contracts for the week. Nymex natural gas price recovered during the week but stayed around the lowest level in 3 years.

Traders bet precious metals to go higher (betting US Treasury yield to drop) ahead of the May FOMC meeting. This was also driven by comments from some officials that the Fed could consider technical rate cut if weak inflation lingers. NET LENGTH for gold futures soared +28 824 contracts, to 66 219 last week. Speculative long positions slipped -584 contracts, while shorts plunged -28 240, resulting in a sharp rise in NET LENGTH. For silver futures, speculative long positions rebounded +1 231 contracts while shorts dipped -1 015. These resulted in a return to NET LENGTH of 2 136 contracts. For PGMs, NET LENGTH of Nymex platinum futures gained +2 242 contracts to 33 322 while that for palladium added +467 contracts to 9 408.

In his tweets on Sunday, Trump complained that the trade deal with China continues "too slower", as "they attempt to renegotiate". Thus, he decided to push trade war with China to full-blown level on Friday, even though Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer are planning to wrap up trade talks with Chinese Vice Premier Liu He in Washington this week.

Trump claimed that the "great economic results" of the US as of late can "partially" be attributed to the additional tariffs China has been paying for 10 months. The included 5% tariffs on USD 50B of high tech goods and 10% on USD 200B of other goods. Trump also claimed that "the tariffs paid to the USA have little impact of product cost, mostly borne by China".

On Friday, Trump will raise the 10% tariffs on the USD 200B of "other goods" to 25%. Additionally, currently "untaxed" USD 325B will be tariffed at rate of 25%.

https://twitter.com/realDonaldTrump/status/1125069836088950784

Market reactions are overwhelmingly negative. Hong Kong HSI gaps down and is trading down -2.44% at the time of writing. China Shanghai SSE is down -3.03%, lost 3000 handle. Singapore Strait Times is d0wn -2.68%. DOW futures is down nearly -500 pts.

In the currency markets, Yen jumps broadly on risk aversion, followed by Swiss Franc and Dollar. Australian, New Zealand and Canadian Dollars are the weakest for now.

As suggested in the CFTC Commitments of Traders report in the week ended April 30, NET LENGTH in USD Index increased +194 contracts to 28 949. Both speculative long and short positions gained during the week. All other major currencies stayed in NET SHORT positions.

Concerning European currencies, NET SHORT for euro futures added +126 contracts to 105 544 with bets increased on both sides. NET SHORT for GBP futures rose +2 833 contracts to 4 668. Speculative long positions fell -2 945 contracts while speculative shorts dropped -112 contracts for the week.

On safe-haven currencies, Net SHORT for CHF futures rose +2 210 contracts to 39 746. NET SHORT for JPY futures increased +5 185 contracts to 99 599 during the week. Speculative long positions declined -7 543 contracts while shorts fell -2 358 contracts.

On commodity currencies . NET SHORT for AUD futures jumped -8 556 contracts to 59 005. Speculative long positions gained +1 766 contracts while shorts soared +10 322 contracts. Separately, NET SHORT for NZD increased to 5 010 contracts last week, with speculative long dropping -2 329 and shorts gaining +3 681 contracts. NET SHORT for CAD futures dropped -748 contracts to 46 745.

Trump Tweet to terrify Asia

President Trump has seriously raised the stakes in this week's round of the US-China trade talks in Washington, threatening to slap a 25% tariff on a mind-boggling USD525 billion of Chinese goods by this Friday. The President has voiced his displeasure at the slow pace of the talks and apparent backtracking by Chinese officials while noting that the US economy is doing very nicely thank you, even with the tariffs that are presently in place.

It's hard to argue with Trump on this point given last Friday's sparkling non-farm payroll and unemployment data. Workforce participation, wage growth and services all missed slightly but were only minor blots on the smooth running of the big-block V8 engine that is the US economy at the moment.

I'm sure the Chinese gave up trying to use game theory to model the President's possible reactions long ago, as the trade talks have progressed slowly over the past months. Trump has taken the proverbial sledgehammer to the walnut this morning and the only two words likely to be on the minds of traders and investors this week are “trade talks”. The US remains in its strongest negotiating position with China in decades and is making it clear they intend to use it to fundamentally reset the asymmetric way China in which does business with the world. If there's one positive financial markets can take from the President's social media bombshell, it is the US is not going to take “easy wins” to get a deal over the line.

Friday's data is likely to be consigned to the dustbin pretty quickly this morning as Asian markets deal with the here-and-now of the trade implications from Trump's tweet. The reaction is not likely to be good, with early currency trading showing safe-haven buying of Japanese yen (JPY) and selling off Australian (AUD) and New Zealand Dollars (NZD). Both the antipodeans have a high beta to the China economy.

Both Australian and New Zealand have interest rate decisions this week. Although I expected increasingly dovish noises to come from both, I expected both to hold pat for now. A deterioration in the state of the US-China trade talks may well be enough for New Zealand, in particular, to pull the rate-cut trigger.

FX

AUD and NZD are already around 0.40% lower in Monday's twilight- zone early trading. The AUD has ominously given back all its Friday gains and slipped back below the 0.7000 support level against the greenback, currently trading at 0.6990. The Kiwi lies at 0.6620, above the important 0.6600 region for now. As the week starts, both are likely to find willing sellers on any rally due to their high China correlation and potentially dovish central banks.

The US dollar fell on Friday across the board as traders booked profits ahead of the weekend. That situation is unlikely to last, and the greenback may rise quite sharply in trading today, with thinning liquidity from Japan's Golden Week holiday. Regional currencies are likely to suffer en masse as traders and investors head for the exit door and the safe-haven of the greenback, US bonds and possibly gold.

Equities

Wall Street's excellent Friday session is likely going to be forgotten. Markets are concentrating on the possible breakdown in US-Sino trade talks. With so much of the region's fortunes closely intertwined with China, we could see a sea of red as regional stock markets open today. Early electronic trading of the S&P 500 mini contracts indicates a fall of 1.68% already.

Investors globally will probably sell first and ask questions later with developed market government bonds benefiting as investors rotate out of equities and wait for the dust to settle. It shouldn't be a surprise, therefore, if both US Treasury and German Bund's rally strongly and bond yields fall.

Oil

Oil marked time on Friday, as both Brent Crude and WTI finished almost unchanged at USD70.85 and USD62.00 a barrel respectively. Given the possibility of a colossal ramp-up of China tariffs by the US by Friday, it's hard to envision anything but oil being heavily sold in Asia today.

Early electronic trading of WTI shows a near 2% fall already to USD60.50 a barrel. Given the strength of oil's rally on global recovery hopes, and the extended long positioning remaining in both contracts, an extended sell-off in Asia could quickly turn to panic.

President Trump has been complaining about the price of oil being too high. He may be about to get his wish.

Gold

Every cloud has a silver – or in this case gold – lining, however, and President Trump's tariff threats may well be a boon for the yellow metal. Having made a comeback on a weaker dollar last Friday, gold is poised to benefit strongly from safe-haven flows as investors dump stocks and rotate into bonds and precious metals.

Early trading indicates a rise of USD6 to USD1,285.00 an ounce, and given the China tariff bombshell, gold should continue to enjoy safe-haven support throughout the Asian session.

EURUSD turns off lower prices with eyes on upside pressure. This has opened the door for more gain in the days ahead. Support comes in at the 1.1150 where a violation will turn risk to the 1.1100 level. A break below here will target the 1.1050 level. Further down, support sits at the 1.1000. Conversely, on the upside, resistance resides at 1.1250 level with a break through there opening the door for further upside towards the 1.1.1300 level. Further up, resistance comes in at the 1.1350 level where a violation will expose the 1.1400 level. Its daily RSI is bullish and pointing higher suggesting more strength. All in all, EURUSD turns off lower prices with eyes on upside pressure on correction.

GBPJPY targets 147.19 resistance zone on more recovery. On the downside, support comes in at the 146.00 level where a violation will aim at the 145.50 level. A break below here will target the 145.00 level followed by the 144.50 level. Conversely, resistance is seen at the 147.00 level followed by the 147.50 level. A cut through that level will set the stage for a move further higher towards the 148.00 level. Further out, resistance resides at the 148.50 level. Its daily RSI is bearish and pointing lower suggesting more gain. All in all, GBPJPY targets 147.19 resistance zone on more recovery.

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EUR/USD stayed in range above 1.1111 temporary low last week as it turned into consolidation. Near term outlook stays bearish with the pair held well below 1.1324 resistance as well as falling 55 day EMA. Initial bias is neutral this week first but downside break out is in favor. On the downside, break of 1.1111 low will target 100% projection of 1.1569 to 1.1176 from 1.1448 at 1.1105 next.

In the bigger picture, down trend from 1.2555 (2018 high) is still in progress. Current fall should now target 78.6% retracement of 1.0339 (2016 low) to 1.2555 (2018 high) at 1.0813. Sustained break there will pave the way to retest 1.0339. On the downside, 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.

In the long term picture, the rejection from 38.2% retracement of 1.6039 to 1.0339 at 1.2516 argues that long term down trend from 1.6039 (2008 high) might not be over yet. EUR/USD is also held below decade long trend line resistance, 55 month and 55 week EMA. Break of 1.0339 will resume the down trend to 100% projection of 1.3993 to 1.0339 from 1.2555 at 0.9501