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'The weakness in today's data extends beyond the weather, and the slowdown in the domestic economy has occurred at a time when the global economic backdrop has improved.' — Michael Workman, Commonwealth Bank

The Australian economy expanded roughly in line with analysts' forecasts in the March quarter, official figures revealed on Wednesday. The Australian Bureau of Statistics reported that the economy grew 0.3% in the Q2, following the preceding quarter's expansion of 1.1% and slightly topping expectations for a 0.2% growth rate. On an annual basis, Australia's GDP rose 1.1% in the second quarter of this year but remained below the required rate. Household consumption, public consumption and inventories contributed 0.3%, 0.2% and 0.4%, respectively, to GDP growth in the Q2. However, the gains were offset by net exports and dwelling investment. Exports dropped 1.6%, while imports rose 1.7%. Thus, the contribution of exports was negative. The public sector, including both consumption and investment, added 0.1% to economic growth, with public infrastructure posting a 0.1% decline. Nevertheless, the Q2 slowdown was expected by the Reserve of Bank of Australia, which held its policy unchanged at its meeting on Tuesday. However, the Bank expressed optimism over the domestic outlook.

Trumpflation becomes Slumpflation as political uncertainty sees oil come to its senses and follow gold higher.

CRUDE OIL

Crude oil prices rose overnight with Brent and WTI finishing some 70 cents higher, offsetting the declines of the previous day. A sagging U.S. Dollar, in general, has played it part, but the primary driver appears to be Qatar’s standoff with the rest of the Arab world. It is now becoming clear that port restrictions on Qatari flagged vessels are going to cause loading disruptions around the region for shipping moving gas and crude.

As mentioned yesterday, the threat of supply disruptions in the Middle East can never be construed as bearish for oil prices, and so it has come to pass. That said, the disruptions are seen as inconvenient rather than systematic and thus will maybe only put a floor on crude in the short term rather than starting a panic rally.

Attention now turns to this evenings U.S. Crude Inventory figures where the street is expecting a 3.5 million barrel draw down to follow last week’s monster 6.4 million barrel draw down. A number at or larger should give cheer to beleaguered oil bulls while a significant undershoot or a positive number will likely see crude coming under sustained short-term pressure again.

Brent spot trades at 49.75 this morning with resistance at 50.60 and then 51.50, the 200-day moving average. Support is delineated now at the 48.70 regions and then 48.00. A break of the latter suggesting a retest of the May lows around 46.30.

WTI spot trades at 47.90 this morning with resistance at 48.25 and then 49.35, the 200-day moving average. Support lies at 46.50 which is a must hold technical level. A break suggesting, like Brent, that more downside pain lies ahead.

GOLD

Gold continued its relentless march higher overnight, rising $17 to test the April high around 1296, before falling slightly to trade at 1292 in the early Asian session. A combination of geopolitical concerns from the Middle East, tomorrows U.K. elections and a wilting U.S. Dollar as the Street loses faith rapidly in the Trumpflation agenda, have played into gold’s hands.

Gold now has a double top at the 1296 area which will be initial resistance followed by the psychological 1300 level. A daily close and consolidation above the latter open up a lot of clear air from a technical perspective, with no resistance until the 1340 region. Technical support is at 1279 initially followed by 1270 and then 1260. The distance between the various technical levels giving plenty of room for intra-day volatility.

With Trumpflation rapidly becoming Slumpflation, and the degree of uncertainty around as we head into the latter half of the week, there would appear to be no reason for gold’s march higher to peter out. Therefore any dips should be well supported in Asia with a test of the highs possibly on the cards sooner rather than later.

• In this piece, we present the main takeaways from our recent trip to London.
• All we met expect PM Theresa May to win the UK election despite polls narrowing. How UKIP voters vote in Brexit constituencies may be decisive for the outcome.
• Still, the Conservatives may regard the election result as a disappointment, making Theresa May less powerful and vulnerable to hardline Brexiters.
• There is a consensus that a Conservative victory would be positive for GBP in the short term. A hung parliament is the most negative scenario.
• We seem to be alone in the view that a governable coalition between Labour, LibDems and SNP would be positive for GBP on 3-12M due to the softer Brexit among the three partiers (expected range 0.75-0.80).
• The most difficult part of the Brexit negotiation is the beginning (not least the settlement of the 'divorce bill'). Most expect a free trade agreement covering goods but not services to be concluded in three to five years.
• The Bank of England is sidelined despite higher inflation due to slower growth and Brexit uncertainties.

Theresa May still set to win – we expect GBP to rally afterwards

Despite the polls having narrowed, PM Theresa May is still expected by most to win the UK election and get a bigger majority than at present but smaller than expected at the beginning of the negotiations. Even if Theresa May regains power, the election may be considered a disappointment by the Conservatives if she wins by less than 80 seats, making it more likely that Conservative backbenchers will make things more complicated for her in the new election term. One bank argued that one should not over-interpret the movements in the opinion polls, as previous UKIP voters are key for the outcome of the election. If UKIP voters opt for the Conservatives in currently Labour-held constituencies, which voted for Brexit in the EU referendum, the mandates may shift to the Conservatives, implying that they may still win a solid majority. Whether the size of the majority will be large enough for Theresa May to avoid being vulnerable to hardline Brexiters is hard to predict, as it depends on the Brexit stance on new members of parliaments. Most expect GBP and UK assets to (relief) rally in case of a Conservative victory, regardless of the size of the victory, as it would remove one source of uncertainty. How big a rally depends on the size of the majority.

A 'hung parliament' (i.e. no party wins absolute majority in the House of Commons) is seen as the most negative scenario, as it would increase the political uncertainty significantly in a situation where it is high to begin with. This would be GBP negative.

We seem to be alone in our view that a governable coalition between Labour, LibDems and SNP would be positive for GBP on 3-12M due to the softer Brexit stance among the three parties. One bank argued that markets will instead focus (among other things) on UK public finances, as Jeremy Corbyn has some expensive promises in his manifesto.

Brexit negotiations set to be difficult

A base case scenario for Brexit has been formed, assuming Theresa May regains power in the UK. Regardless of the size of Theresa May's majority, we are heading for a hard Brexit, with the UK leaving both the single market and the customs union. However, her flexibility depends on the election outcome. A slim majority will make Theresa May vulnerable to hardline Brexiters, increasing the risk of a 'no deal' Brexit, while a bigger majority makes a smooth Brexit more likely (what we have labelled a 'decent Brexit' ourselves). Experts expect the most difficult part of the negotiations to be in the early stage, as the UK wants to negotiate withdrawal terms and future relationship simultaneously while the EU wants a phased approach by settling the withdrawal terms first (not least the so-called 'divorce bill') before moving on to discussing a free trade agreement. While it is difficult for the UK Prime Minister to sign a divorce bill in the range of EUR60-100bn without knowing the future relationship, a compromise could be to agree on the calculation principles before doing the actual calculations at the very end of the discussions. No one expects a possible free trade agreement to be concluded within two years, so we are likely to have a transitional period, where the discussions can continue. The free trade agreement is likely to cover goods but not services, which will hurt the service-oriented UK economy in the long term. One concern is that the UK does not have the necessary staff either to negotiate Brexit or afterwards when the UK takes over bureaucratic responsibility for itself from the EU.

Growth to remain weak short term – Bank of England sidelined during Brexit negotiations

Looking at the economy, we are pretty much in line with the consensus view. Most expect UK growth to continue slightly below trend growth of 0.4% in the short term (no recession although unemployment may begin to tick up slightly). The main reason is the real pay squeeze, which slows private consumption growth and business investments are unlikely to take over due to Brexit uncertainties. Also, we are yet to see a positive impact on net exports as the import content of exports is high, i.e. the weaker GBP increases import prices thus offsetting the positive impact on export prices. Inflation is expected to peak around 3% later this year but consensus is that the Bank of England will see through this due to concerns about economic activity and Brexit uncertainties. Like us, most expect the first hike from Bank of England at the earliest in mid-2019 after the withdrawal negotiations are concluded. A game changer could be if wage growth accelerates and responds to higher actual inflation at some point but this is considered unlikely.

Daily Pivots: (S1) 0.7468; (P) 0.7495; (R1) 0.7533; More...

AUD/USD's strong rally and break of 0.7516 resistance indicates that the decline from 0.7748 is already completed at 0.7328. Intraday bias is back on the upside for 0.7748 and possibly above. But then, we'll be cautious on topping again as it approaches medium term fibonacci level at 0.7849. On the downside, below 0.7456 minor support will turn bias back to the downside for 0.7328 short term bottom.

In the bigger picture, we're still treating price actions from 0.6826 low as a corrective pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8091) and above.

Australian dollar surges broadly today as GDP grew 0.3% qoq in Q1, meeting market expectations, even though it's sharply slower than prior quarter's 1.1% qoq. But after all, it's the 103rd successive quarter, or 26 years, without recession. And it's now a new world record of a country without a recession. Treasurer Scott Morrison said that "the results demonstrate the continued resilience of the Australian economy:" Some analysts noted that the slowdown in Q1 showed that the economy is "tired". But Morrison blamed the weather for the slowdown in Q1 and argued that improvements would be seen ahead. He noted that RBA Governor Philip Lowe reiterated yesterday that he expects the economy to grow above 3% in the next couple of years.

Technically, AUD/USD took out 0.7516 resistance rather decisively today. The development suggests that recent decline from 0.7748 has reversed and more upside is expected in near term. EUR/AUD's break of 1.4927 support also indicates near term topping at 1.5226. Deeper fall is now in favor for the cross to head back to 55 day EMA at 1.4654.

Sterling mixed as election awaited

Sterling continues to trade mixed as markets await the highly uncertain election tomorrow. The latest Survation poll found that Prime Minister Theresa May's Conservatives at 41.5% and Labour at 40.4%, just 1.1% apart. According to YouGov's model, Conservatives could get just 304 seats in the Commons, down 26 from prior parliament. On the other hand, Labour could get 266 seats, up 37. That is, neither one will get the 323 seats required for absolute majority.

We'll try not to predict the outcome of the election, which now becomes too hard to predict. But we do have anticipation on market reactions depending on the outcome. It should be noted again that Sterling surged sharply when May announced the snap election. Conservatives had over 20 pts lead over Labour back then. And the Pound started to struggle when Labour gained momentum recently. We'd expect to see such pattern continue as the vote counts are being released.

Dollar mixed with eyes on Comey

Dollar is trading mixed ahead of former FBI Director James Comey's hearing with Senate intelligence committee tomorrow. It's reported that Director of National Intelligence Daniel Coats and CIA Chief Mike Pompeo received closed-door complaint by US President Donald Trump regarding Comey's handling of the investigation of Russia's intervention in the 2016 election. But the Office of the Director of National Intelligence declined to comment. Meanwhile, it's reported that Comey has asked Attorney General Jeff Sessions not to leave him alone with Trump.

On the data front

New Zealand manufacturing activity rose 2.8% in Q1. Australia GDP rose 0.3% qoq in Q1. Japan leading index dropped to 104.5 in April. German factory orders dropped -2.% mom in April. Swiss foreign currency reserves dropped slightly to CHF 694b in May. Canada building permits will be released later in the day.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7468; (P) 0.7495; (R1) 0.7533; More...

AUD/USD's strong rally and break of 0.7516 resistance indicates that the decline from 0.7748 is already completed at 0.7328. Intraday bias is back on the upside for 0.7748 and possibly above. But then, we'll be cautious on topping again as it approaches medium term fibonacci level at 0.7849. On the downside, below 0.7456 minor support will turn bias back to the downside for 0.7328 short term bottom.

In the bigger picture, we're still treating price actions from 0.6826 low as a corrective pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8091) and above.

Economic Indicators Update

Investors remain cautious for a third day in a row ahead of several key events that may spark volatility including former FBI Director James Comey's testimony, the UK general election and the ECB meeting, which are all taking place on Thursday.

Risk assets are obviously not ideal at this stage as any of the three major events may trigger a selloff in equity markets, which explains some investors' behavior who have moved into the defensive. While safe havens such as treasuries, gold, and the Japanese Yen rallied, some traders might be questioning the status of the U.S. dollar which fell to a seven-month low.

Economic data alone is not enough to justify the new post-Presidential election low in the Greenback especially when the Fed remains the only major central bank tightening monetary policy. So, what's going wrong here?

I think the explanation may be found in U.S. treasury yields. The short end of the yield curve is mainly determined by monetary policy actions, and given that the Fed is still expected to raise interest rates in June, and probably another hike by year end, yields on the two-year treasury notes may remain well supported. However, the falling end of the treasury yield curve which reflects investors' future growth and inflation expectations has more to say, and I can see clear signals that investors are growing more skeptical towards the reflation trade which drove equities to record highs in 2017.

The ten-year treasury yields fell to 2.13% yesterday, the lowest level since November 10th, and the differential between the two-year and ten-year yields are back to levels prior to Trump's election. This should be a warning signal, not just for the U.S. dollar but also for equity markets trading at high multiples. The justification for overstretched valuations might not be supported much longer as a failure to pursue the promised tax reforms and stimulus plans will eventually trigger a selloff. At this stage, I still recommend remaining well diversified with a blend of growth and value stocks, but should pessimism grow towards Trump's administration, then moving into the defensive sector will be a better play.

Comey's testimony is crucial tomorrow. While it's known that many questions will remain unanswered, the biggest question remains to be whether the former FBI director will accuse the President of abusing his power to derail the FBI's investigation and whether there's any indication of potential links between Russia and the Trump election campaign. Should the testimony reveal any unexpected surprises, the same will be reflected in the financial markets.

The US dollar continued to remain weak with price action yesterday showing the greenback extending the declines. This kept the EUR/USD biased to the upside, although price action was largely muted. Investors will be looking to the "Super Thursday" tomorrow where the ECB meeting alongside the UK elections will impact the markets.

The uncertainty is evident by the fact that the euro and the British pound remains subdued. On the economic front, the economic calendar today is light with the early Asian session seeing the release of the quarterly GDP report from Australia.

Official data showed that the Australian GDP expanded 0.3% on a quarterly basis, slightly better than expected, but weakened, following the 1.1% Q4 2016 economic expansion

EURUSD intraday analysis

EURUSD (1.1260): EURUSD was bullish yesterday, but price action continues to be maintained within Friday's range. With price action supported above 1.1245, the bias remains to the upside. The current decline could see EURUSD slipping back to test this support as investors are likely to book profits ahead of the ECB meeting tomorrow. On the 4-hour chart, the bearish divergence is building up, and this warrants caution as price action could risk invalidating the bullish flag pattern on the daily chart. A decline below 1.1245 could signal a test towards 1.1200 support level.

GBPUSD intraday analysis

GBPUSD (1.2897): The British pound closed with a doji yesterday, but price action remained broadly flat with the bullish momentum being maintained above 1.2800 support level. A decline to the downside could signal a continuation on a break down below this support. On the 4-hour chart, we can see price testing the minor resistance level at 1.2937 with a doji close. This potentially suggests that GBPUSD could test 1.2800 in the event of a downside move. Therefore, the possible decline to 1.2600 which marks the downside target in the head and shoulders pattern remains.

USDJPY intraday analysis

USDJPY (109.53):The USDJPY extended the declines, falling to a fresh two-month low. However, price action is likely to remain subdued with the longer-term support zone seen at 109.50 - 109.25. Currently, we notice price action consolidating at this level. However, unless a higher low is formed to the upside, USDJPY remains biased lower with the potential to test 108.30 support level. To the upside, a retracement could, however, keep USDJPY recover to retest 110.79 where resistance level is likely to be developed.

Weekly
    •    Last Candlesticks pattern: Shooting doji
    •    Time of formation: 20 Feb 2017
    •    Trend bias: Sideways

Daily
    •    Last Candlesticks pattern: Bearish engulfing pattern
    •    Time of formation: 21 Mar 2017
    •    Trend bias: Near term down



Aussie has rallied after finding renewed buying interest at 0.7372 last week on broad-based weakness in the greenback, the subsequent break of resistance at 0.7518 signals a temporary low has been formed at 0.7329, hence consolidation with upside bias is seen for the rebound from there to extend gain to another previous resistance at 0.7611, having said that, aussie needs to break this level to signal the fall from 0.7750 top has ended and bring subsequent rise towards resistance at 0.7680 but price should falter below chart resistance at 0.7750.

On the downside, whilst initial pullback to 0.7500 and possibly towards the Tenkan-Sen (now at 0.7464) cannot be ruled out, reckon downside would be limited to 0.7415-20 and bring another rebound later. Only below said support at 0.7372 would revive bearishness and suggest the rebound from 0.7329 has ended, bring retest of this level, break there would extend recent fall from 0.7750 top to 0.7300 and possibly 0.7250-60 but reckon downside would be limited to 0.7200-10 and price should stay well above indicated previous chart support at 0.7158.



Recommendation: Stand aside for this week.

On the weekly chart, aussie found good support at 0.7372 and has staged a strong rebound (a long white candlestick looks set to be formed this week), adding credence to our view that low has been formed at 0.7329, hence consolidation with upside bias is seen for further gain towards previous resistance at 0.7611, however, break there is needed to signal the fall from 0.7750 has ended at 0.7329, bring further gain towards resistance at 0.7680, having said that, price should falter below said resistance at 0.7750.

On the downside, although pullback to 0.7500 cannot be ruled out, reckon the Tenkan-Sen (now at 0.7470) would limit downside and bring another rebound. A weekly close below the Kijun-Sen (now at 0.7454) would risk weakness to 0.7400 but only break of said support at 0.7372 would suggest the rebound from 0.7329 has ended and revive bearishness for reset of tis level. A break there would extend recent decline from 0.7750 to 0.7290-00 and possibly towards 0.7230, however, downside should be limited to 0.7200 and price should stay well above previous support at 0.7158, risk from there is seen for a rebound to take place later. 

USD/CHF - 0.9638

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9633

Kijun-Sen level                    : 0.9633

Ichimoku cloud top                 : 0.9671

Ichimoku cloud bottom              : 0.9644

Original strategy :

Sell at 0.9685, Target: 0.9585, Stop: 0.9720

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.9700, Target: 0.9600, Stop: 0.9735

Position : -

Target :  -

Stop : -

As the greenback has recovered after marginal fall to 0.9613, suggesting consolidation above this level would be seen and corrective bounce to the upper Kumo (now at 0.9671) is likely, however, reckon upside would be limited to 0.9700-05 and bring another decline later to 0.9600-05 (50% projection of 1.0100-0.9692 measuring from 0.9808) but oversold condition should limit downside to 0.9570 and price should stay above support at 0.9550, risk from there has increased for a rebound to take place later.

In view of this, we are looking to sell dollar on recovery as 0.9700 should limit upside. Only break of resistance at 0.9720 would abort and signal a temporary low is formed instead, bring a stronger rebound to 0.9750 and then 0.9761 resistance but price should falter below resistance at 0.9808.

GBP/USD - 1.2892

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2906

Kijun-Sen level                    : 1.2911

Ichimoku cloud top              : 1.2907

Ichimoku cloud bottom        : 1.2894

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Sterling’s retreat after yesterday’s brief rise to 1.2950 has retained our view that further consolidation below this level would be seen and pullback to 1.2865-70 cannot be ruled out, however, break of indicated support at 1.2830 is needed to confirm top has been formed and suggest the rebound from 1.2769 has ended, bring further fall to 1.2800.

On the upside, expect recovery to be limited to 1.2925-30 and said resistance at 1.2950 should remain intact, bring another retreat later. Only break there would extend the erratic rise from 1.2769 to 1.2970, however, as broad outlook remains consolidative, reckon upside would be limited to 1.3000 and indicated previous resistance at 1.3015 should remain intact. As near term outlook is still mixed, would be prudent to stand aside for now.