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Dollar trades in rather tight range as the markets await the summit between US President Donald Trump and China President Xi Jinping. They will greet each other at Trump's Mar-a Lago retreat in Florida late in the afternoon and dine together. The summit will conclude with a working lunch tomorrow. Pressure is on Trump's shoulder to deliver something concrete out of the meeting. Those would include bringing jobs "stolen" by the Chinese back to the US, ending China's "currency manipulation", push China to use its "great influence" on North Korea, etc. Some market participants might have high expectation on the outcome of the summit. But other might just prefer Trump to move his focus back to tax reform, which is, in our view, more essential in determining the financial markets' direction.

Released from US, initial jobless claims dropped 25k to 234k in the week ended April 1, below expectation of 250k. Prior week's figure was revised up by 1k to 259k. Initial claims have now stayed below 300k level for the 109 straight week, the second longest streak since 1970s. Four week moving average dropped 4.5k to 250k. Continuing claims dropped 24k to 2.03m in the week ended March 25. Challenger job cuts dropped -2.0% yoy in March. From Canada, building permits dropped -2.5% mom in February.

Fed Williams: Takes around five year to shrink balance sheet

San Francisco Fed President John Williams said that it may take around five years for Fed to wind down the $4.5T balance sheet. And, "towards the end of this year would be a good time to take that next step" of normalization of the balance sheet, "assuming the economy progresses.

The minutes of the March FOMC meeting was overall hawkish. They outlined the steps to shrink the USD 4.5T balance sheet. The minutes noted that the reduction has to be "gradual and predictable", accomplished by "phasing out" or reinvestment and such process could start "later this year". No detail is provided yet but the minutes said Fed will "its deliberations on reinvestment policy during upcoming meetings and would release additional information as it becomes available."

Meanwhile, some officials are concerned that if unemployment falls further, it could pose "significant upside risk" of inflation. The minutes also showed "some participants viewed equity prices as quite high relative to standard valuation measures." More on FOMC Minutes: FOMC Might Begin Shrinking Balance Sheet In Late-2017

ECB Draghi: Reassessment of policy stance not warranted

ECB President Mario Draghi expressed today his confidence that "our policy is working and that the outlook for the economy is gradually improving." However, he emphasized that there was no "sufficient evidence to materially alter our assessment of the inflation outlook". Therefore, "reassessment of the current monetary policy stance is not warranted at this stage." And those include "interest rates, asset purchases and forward guidance."

ECB chief economist Peter Praet said that introducing the idea of a rate hike will undo some of the stimulus because of changed market expectations. He said that "if investors start perceiving that the path of the policy rate is subject to upward uncertainty ... long-term interest rates will be pushed higher and asset purchases will become less effective." On the other hand, separately, Bundesbank head Jens Weidmann said that the time for ECB to scale back stimulus was fast-approaching.

Eurogroup Dijsselbloem urged UK and EU to stay away from the cliff

Eurogroup head Jeroen Dijsselbloem urged UK and EU to keep future trade relationship "as close as possible". He said that "the longer I think about it, the longer we study all the topics that need to be negotiated, the more worried I get. It is hugely complex, it is going to take a lot of effort from both sides to try and manage it." And, he urged to "try to stay away from the cliff of the [World Trade Organization] standards" as they would be very damaging to trade between the different regions."

Yesterday, the European Parliament voted 516-133, with 50 abstentions, for the phased approach of Brexit negotiation, rather than parallel. European Union chief negotiator Michel Barnier said yesterday that "parallel talks" on Brexit terms and future trade relationship is "a very risky approach". And, he emphasized that to succeed, "we need on the contrary to devote the first phase of negotiations exclusively to reaching an agreement on the principles of the exit."

Release from Europe, Eurozone retail PMI dropped to 49.5 in March. Germany factory orders rose 3.4% mom in February. Swiss CPI was unchanged at 0.6% yoy in March.

BoJ Kuroda favorite to get second term

In Japan, it's reported that BoJ Governor Haruhiko Kuroda is Prime Minister Shinzo Abe's favorite for the job. And Kuroda will likely renew for another five year term next year. Reuters quoted unnamed source saying that Abe trusts Kuroda and believed he did a "very good job". Also, the it's believed that Abe's administration is happy with impact of BoJ's QQE program that keep government borrowing costs very low. The selection process for the next BoJ Governor will start in the second half of this year.

Release in Asia, Japan consumer confidence rose to 43.9 in March. China Caixin PMI services dropped to 52.2 in March.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 110.33; (P) 110.89; (R1) 111.25; More....

USD/JPY is still bounded in range of 110.10/112.19 and intraday bias remains neutral at this point. On the downside, break of 110.10 will resume the whole corrective decline from 118.65 and target 50% retracement of 98.97 to 118.65 at 108.81. On the upside, however, break of 112.19 resistance will indicate short term reversal and turn bias back to the upside for 115.49 resistance.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Nonetheless, sustained trading below 55 week EMA (now at 111.16) will extend the consolidation from 125.85 with another fall through 98.97 before completion.

Economic Indicators Update

USD/CAD - 1.3434

 
Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend:  Near term up

 
Original strategy       :

Buy at 1.3375, Target: 1.3550, Stop: 1.3315

Position: -

Target:  -

Stop: -

 
New strategy             :

Buy at 1.3375, Target: 1.3550, Stop: 1.3315

Position: -

Target:  -

Stop:-

As the greenback staged a strong rebound after holding above indicated previous support at 1.3264, consolidation with upside bias is seen and above 1.3456 resistance would add credence to our view that the correction from 1.3535 has ended and bring further gain to 1.3495-00 but break there is needed to signal upmove has resumed for retest of 1.3535, once this level is penetrated, this would extend recent recent upmove from 1.2969 to 1.3575-80 but previous chart resistance at 1.3599 should hold on first testing.

In view of this, we are looking to buy on pullback as 1.3370-75 should limit downside and bring another rise. Below 1.3340 would abort and suggest the rebound from 1.3264 has ended instead, bring further fall to 1.3300-10 but said support at 1.3264 should remain intact. Only a break below this level at 1.3264 would shift risk back to downside for the fall from 1.3535 to extend weakness to 1.3235-40 (61.8% Fibonacci retracement of 1.3056-1.3535) and then 1.3200-10. 

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

USD/CHF - 1.0039

Original strategy :

Buy at 0.9950, Target: 1.0050, Stop: 0.9915

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9950, Target: 1.0050, Stop: 0.9915

Position : -

Target :  -

Stop : -

As the greenback has maintained a firm undertone after last week’s rally above 1.0003 resistance, suggesting recent rise from last week’s low at 0.9813 is still in progress and bullishness remains for this move to 1.0080, then towards previous resistance at 1.0109, however, loss of upward momentum should prevent sharp move beyond latter level and reckon 1.0140-50 would hold, risk from there has increased for a retreat to take place later. 

In view of this, would not chase this rise here and would be prudent to buy dollar on pullback as support at 0.9948 should limit downside. Below 0.9925-30 would abort and signal top is formed instead, bring correction to 0.9905-10 but reckon previous resistance at 0.9869 would hold from here. 

GBP/USD - 1.2466

Original strategy :

Sold at 1.2465, Target: 1.2365, Stop: 1.2500

Position : - Short at 1.2465

Target :  - 1.2365

Stop : - 1.2500

New strategy  :

Hold short entered at 1.2465, Target: 1.2365, Stop: 1.2500

Position : - Short at 1.2465

Target :  - 1.2365

Stop : - 1.2500

Cable’s rebound after holding above support at 1.2419 suggests further consolidation above this level would be seen, however, as long as indicated resistance at 1.2500 holds, mild downside bias remains for another fall, below said support at 1.2419 would bring test of 1.2400 but break there is needed to add credence to our view that the rebound from 1.2377 has ended at 1.2559, bring further fall towards support at 1.2377. Looking ahead, only a drop below 1.2377 would confirm the fall from 1.2616 is still in progress for subsequent decline towards key support at 1.2335.

In view of this, we are holding on to our short position entered at 1.2465 but one should exit on such decline. Only break of said resistance at 1.2500 would abort and suggest low has been formed instead, risk a stronger rebound to 1.2525-30, then towards resistance at 1.2559.

EUR/USD - 1.0659

Original strategy  :

Sell at 1.0725, Target: 1.0610, Stop: 1.0760

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.0725, Target: 1.0610, Stop: 1.0760

Position : -

Target :  -

Stop : -

As the single currency has remained under pressure after recent selloff, bearishness remains for the decline from 1.0906 to extend further weakness to 1.0620, then test of previous chart support at 1.0600, however, a sustained breach below the latter level is needed to retain downside bias for subsequent selloff to 1.0570-75 first.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as 1.0720-30 should limit upside. Only a firm break above resistance at 1.0773 would suggest low is formed instead, bring a stronger rebound to 1.0800 but resistance at 1.0827 should remain intact. 

USD/JPY - 110.80

Original strategy  :

Sell at 111.10, Target: 110.10, Stop: 111.45

Position :  -

Target :  -

Stop : -

New strategy  :

Sell at 111.10, Target: 110.10, Stop: 111.45

Position :  -

Target :  -

Stop : -

As the greenback ran into renewed selling interest at 111.46 and has dropped sharply, retaining our bearishness for the decline from 112.20 top to resume after consolidation, below 110.27 (this week’s low) would confirm and extend the fall from 112.20 to last week’s low at 110.11. Looking ahead, break there is needed to retain downside bias and confirm medium term decline has resumed for further subsequent fall to 109.80-85 (1.618 times projection of 112.20-111.12 measuring from 111.59) which is likely to hold on first testing.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as 111.00-10 should limit upside. Only above 111.46 resistance would abort and prolong choppy trading, risk rebound to 111.59, then towards 111.90-00 later but price should falter well below said resistance at 112.20. 

Global stocks were vulnerable to sharp losses during late trading on Wednesday after investors were caught unprepared by the hawkish Federal Reserve minutes. The negative momentum has already rippled into Thursday's trading session with Asian shares concluding depressed. European markets may be exposed to further downside shocks as anxiety ahead of the Trump-Xi summit dents risk sentiment. Gains on Wall Street may be limited this week with the appetite for risk diminished by signs of the Federal Reserve unwinding its $4.5 trillion balance sheet. The phenomenal stock market rally could start facing serious headwinds moving forward especially when considering how investors have started to question the logic and sustainability of the Trump rally.

Trump-Xi summit round 1

A strong sense of caution has masked the financial markets on Thursday with investors on high alert ahead of the heavily anticipated Trump-Xi summit. With Trump in the past repeatedly accusing China of keeping its currency at artificially low levels against the Dollar and stealing American jobs, the outcome of the meeting is something that remains unknown. If Trump decides to play hardball and maintains his harsh rhetoric on China, then risk aversion may intensify consequently sending investor's rushing towards safe-haven assets. It must be kept in mind that one should always expect the unexpected with Trump and such could create a possibility of the meeting concluding on a positive note.

Fed hawks support Greenback

Dollar bullish investors were gifted a hawkish surprise on Wednesday after the Fed minutes showed that the Central Bank is planning to shrink its $4.5 trillion balance sheet. Despite the "Dovish hike" in March, the overall tone of the minutes was hawkish which supported the Greenback. With the short-term bulls looking beyond the Trump uncertainty to elevate the Dollar, further upside could be expected if Friday's NFP exceeds expectations. From a technical standpoint, the Dollar Index is hovering around 100.50 with 101.00 as a possibility if bulls can maintain control. In an alternative scenario, weakness back below 100.25 could open a path back towards the psychological 100.00 level.

Draghi Strikes again

The EUR stumbled lower during trading on Thursday after Mario Draghi stated there was no need to change the current policy path amid the weak inflationary pressures. This dovish statement has quelled the heated expectations of the ECB raising rates at the end of the year with the probability dropping below 20%. As risks in Europe remain tilted to the downside and political uncertainty weighing heavily on sentiment, the Euro could be instore for further punishment. From a technical standpoint, the EURUSD remains heavily pressured on the daily charts. Previous support around 1.0750 could transform into a dynamic resistance that encourages a decline towards 1.0500.

Commodity spotlight - Gold

Gold staged an impressive rebound during late trading on Wednesday with prices closing above $1250 as anxiety heightened ahead of the Trump-Xi summit. Although the impressive ADP report and hawkish Fed minutes enticed bears to enforce some downside pressures, the mounting uncertainty across the board has ensured the metal remains buoyed. With the Brexit negotiations, elections in Europe and Trump developments likely to create a risk-off atmosphere, Gold remains somewhat supported in the medium term. From a technical standpoint, bulls need to break above the stubborn $1260 resistance for the bullish trend to continue.

Spot gold has been consolidating in the range between 1238 - 1260 in the past two weeks.

The bulls have failed to break through the short term major resistance level at 1260 over the period.

On the 4-hourly chart, the current price is trading below the downside uptrend line. In addition, the 10 SMA is crossing over the 20 SMA downwards, indicating the bullish momentum is waning.

US President Trump and Chinese president Xi Jinping, are scheduled to meet today at Trump's Mar-a-Lago resort in Florida. This is the first meeting between the leaders of the two biggest economies in the world so markets will be looking for any comments made between these 2 world leaders.

Be aware that the political event and the news that associate with impacts on the US economy, will likely cause volatility for USD and gold prices.

US non-farm payroll and unemployment for March will be released this Friday at 13:30 BST, it will also cause volatility for USD and gold prices.

US initial jobless claims (the week ending March 31) will be released at 13:30 BST today.

The resistance level is at 1255, followed by 1257.50 and 1260.
The support line is at 1250.00, followed by 1247 and 1243.50.

Dow continues to trade within 20450/20700 congestion, where the index is holding for nearly two weeks, after pullback from new all-time high at 21160 stalled. Choppy trading, seen in past few days, is without clear direction, however daily indicators are heading south; MACD is in negative territory and bearish momentum building up that keep bearish alignment of the daily picture.

In addition, strong upside rejection at 20827 on Wednesday that left big bearish candle with long upper wick, continues to weigh on market.

Fresh extension lower on Thursday penetrated into rising daily Ichimoku cloud which underpins strong bull-trend since early Nov 2016, could be also seen as bearish signal.

Daily cloud top lies at 20635 and close below it would keep negative near-term sentiment for renewed attempts towards 20500/450 support zone.

Range boundaries mark pivotal points for firmer direction signals on break of either side.

Weakening daily and bearish studies on lower timeframes keep the downside vulnerable for now.

Res: 20635; 20700; 20742; 20827
Sup: 20512; 20451; 20437; 20355

Thursday April 6: Five things the markets are talking about

The FOMC minutes yesterday made it clear that shrinking the +$4.5T balance sheet will be a priority for U.S policy makers in the coming years, but probably would start very "gradually" and not until late this year at the soonest.

The timing is the biggest issue; some Fed members indicated that the process would begin when a specific funds rate is achieved; while others argued they wanted to start based on a "qualitative" assessment of the economy.

Obviously, investors would like the certainty of a defined trigger because that provides some clarity in what will be an unprecedented move by the Fed.

A portion of communiqué was devoted to high stock prices, noting that prices are now above "some standard measures of valuations above historical norms" and that "some measures of valuations, such as price-to-earnings ratios, rose further above historical norms." The net result, the main reason why global equities are having a tough go of it in the overnight session.

Worries about the "Trump trade" pro-business agenda is also a market concern now that U.S House Speaker Ryan indicated that the White House and Congress are still 'not' on the same page in terms of tax reform.

Market focus remains on today's upcoming discussions between the leaders of the U.S and China in Florida.

1. Stocks struggle after valuation concerns

Global equities have slid and U.S futures have ticked lower now that the Fed has indicated they favour shrinking the bank's balance sheet this year.

Japanese stocks led the losses, falling the most in two-weeks to sit at their lowest point in four-months. The Nikkei dropped -1.4% aided by a stronger yen (¥110.57), the lowest close since early Dec. The broader Topix dropped -1.6%.

In Hong Kong, the Hang Seng lost -0.4%, while the Hang Seng China Enterprises Index was down -0.6%. In China, the Shanghai Composite rose +0.3% following yesterday's +1.5% jump.

Elsewhere, Australia's S&P/ASX 200 Index fell -0.5%, while South Korea's Kospi index also fell -0.5%.

In Europe, indices are trading lower as markets fret ahead of today's ECB minutes of the latest policy meeting (07:30am EST). Banking stocks are weighing on Eurostoxx 600, while commodity names are providing some support to the FTSE 100.

U.S stocks are set to open in the red (-0.1%).

Indices: Stoxx50 -0.3% at 3,460, FTSE -0.6% at 7,288, DAX -0.5% at 12,162, CAC-40 -0.2% at 5,082, IBEX-35 -0.1% at 10,396, FTSE MIB -0.5% at 20,144, SMI -0.5% at 8,600, S&P 500 Futures -0.1%

2. Oil glut worries has bulls backing off, gold lower

U.S crude inventory data temporarily pressured global prices yesterday afternoon when the U.S Energy Information Administration (EIA) against an expected drop of -400k barrels reported a surprise jump of +1.6m barrels. It was very much in contrast to Tuesday's API's -1.8m drawdown.

However, because of the U.S glut issues, domestic crude exports have risen to a record +1.1m bpd. Most cargoes are going to Asia, where there are early signs of a "tightening" market due to efforts led by the OPEC cut in production. Technically, the global picture is more important (than just the U.S.) and stocks are being drawn, supporting prices.

Crude prices are on track for a weekly gain of around +3%. Ahead of the U.S open, Brent crude futures are up +6c at +$54.42 a barrel, U.S West Texas Intermediate (WTI) crude futures are up +1c at +$51.16 a barrel.

Gold has edged lower (-0.1% to $1,253.21 per ounce), pressured by a slightly firmer dollar and on profit taking after bullion's recent challenge to the upside. Investors are waiting for tomorrow's non-farm payroll (NFP) before fully committing to the next leg.

3. Fixed Income tries to decipher Fed's actions

U.S yields have ticked up a tad after yesterday's release of the Fed minutes as officials signal they will start paring back its massive balance. Any signal from the Fed to start 'trimming' could drive investors to sell Treasury bonds more aggressively and push yields substantially higher and make the dollar more attractive. The 10-year yield is +2.380% vs. +2.361% before the minutes.

Note: The effect could be moderate if the Fed takes a slow approach, which is to slowly taper its reinvestments without outright sales of Treasury holdings.

Yields on 10-year German Bunds are under pressure this morning, briefly touching an intraday low of +0.241%, on ECB Draghi's speech. He noted that there is "scant evidence" that inflation will be durable and will stabilize at just under +2% – one of the central bank's four criteria of a "sustained adjustment."

Note: With the odd's now stacking up against Marine Le Pen winning the French Presidential election, fixed income traders are focusing more on Italian debt since Beppe Grillo, founder of Italy's Eurosceptic Five Star Movement, has a large lead in opinion polls as an Italian general election looms within 12-months.

4. Dollar sees mixed results on policy and geopolitical concerns

In Asia, safe haven demand on North Korean tensions saw yen rally to an intraday high of ¥110.30, before settling at ¥110.50'ish. AUD was the other main mover in the session, pressured by the banking regulator and China data (see below). The Australian Banking Regulator intends to make banks hold more capital against risky mortgage lending.

In Europe, it's been a relatively subdued session with overall market focus remaining on upcoming discussions between the leaders of the U.S and China.

The EUR is softer after ECB's Draghi dampened any speculation of any imminent change in its policy stance. The single unit hit a three-week low at €1.0630 following Draghi's commentary on forward guidance (see below).

Earlier this morning, the Reserve Bank of India (RBI) narrowed its rate corridor (not expected); left its Repurchase Rate unchanged at +6.25%, but raised the Reverse Repo by +25bps to +6.00%.

5. Draghi 'dovish,' China data weaker

Draghi dampened any speculation of any imminent change in ECB's policy stance. The ECB President reiterated that monetary policy stance remains appropriate; needed to see more inflation confidence before winding down the bank's massive monetary stimulus. Currently, the markets are betting that the ECB will start to increase rates early in 2018, before it ends its bond-purchase program.

In China overnight, the Caixin Services and Composite PMI's hit a six-month low (52.2 vs. 52.6 prior) with both manufacturers and service providers noting slower expansions in output.

Digging deeper, there is evidence of weaker growth in composite new-orders, weakest expansion of employment for this year and slowing input price inflation.

The Hong Kong composite PMI (49.9 vs. 49.6 prior) remained in contraction for a third-consecutive month, though it hit slightly higher levels thanks to first growth in output in two-years and another increase in total input costs during March.

Expectations for output over the next 12-months remains subdued amid economic downturn, political uncertainty, and higher housing rental costs.