Today, the US officially raised the tariff rate on USD 200bn of Chinese goods, in the midst of trade negotiations between the two sides. The market reaction was subdued, with investors perhaps eager to find out whether the talks will yield anything positive today. Yesterday, the Norges Bank kept its forward guidance unchanged and added that the next rate increase is likely to happen in June. As for the economic data, today’s agenda includes the 1st estimate of the UK GDP for Q1, the US CPIs for April and Canada’s employment report for the same month.
Investors Stay in Risk-averse Mode Amid Trade Uncertainty
The dollar was found lower against most of the other G10 currencies during the early European morning today. It gained only against SEK, while it traded virtually unchanged against GBP and NOK. The main gainers were CHF, NZD and EUR in that order.
Although not clear in the FX world, investors’ morale remained subdued during the EU and the US trading sessions and this was evident by the performance in equity markets, where major indices were a sea of red. That said, risk aversion eased during the Asian morning today, with Japan’s Nikkei closing only 0.27% down and China’s Shanghai Composite gaining 3.10%.
It seems that investors remained concerned ahead and during the first day of this two-day round of US-China trade negotiations. Yesterday, Chinese Vice Premier Liu Hue, US Trade Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer held discussions for around one hour and a half, but they did not speak to journalists thereafter. That said, US President Trump said that Chinese President Xi Jinping wrote him “a beautiful letter” on trade, sparking fresh hopes that the tariff hike may eventually be suspended. This may have been the reason behind the short covering in Asian equities during their early trading hours.
Nevertheless, tariffs kicked in as planned. At 04:01 GMT, the US officially raised the rate on USD 200bn of Chinese goods to 25% from 10%, with China responding immediately and saying that it is forced to retaliate, though it expressed its desire for both sides to meet halfway on trade in order to secure a deal. There was not a major market reaction at the time of the announcment, which suggests that most of today’s tariff increase was already priced in. All this was in line with our view. Yesterday, we said that our view was for the US to indeed proceed with the tariff hike, but given that the action appeared to be largely factored in, we added that upcoming market directions could depend on headlines and comments surrounding the talks.
Talks are scheduled to continue today, with investors perhaps eager to find out whether there was some progress made. Even though it is highly unlikely to get a deal today, sanguine remarks could revive hopes that this could happen in the weeks to come and perhaps tempt investors to divert some flows from safe havens to riskier assets. On the flip side of the coin, anything suggesting that the two nations are nowhere close to an accord could add to concerns of further escalation in the foreseeable future, and thereby keep investors’ risk appetite subdued for longer. Remember that on Sunday, apart from today’s tariff increase, Trump also threatened that USD 325bn of additional Chinese imports will be taxed shortly, at a 25% rate. Yesterday, he noted that he was “starting paperwork” on that front.
Back to the currencies, the Norwegian Krone was found virtually unchanged against the US dollar, but the ride was not as quiet as it seems. NOK rallied during the European morning, after the Norges Bank maintained the view that its next hike would most likely happen in “the course of the next half-year”, also noting that this could happen in June. Not only this came as a surprise to those expecting the Bank to push back its hike timing, the more-specific mention to June added further hawkishness, resulting in a stronger NOK. That said, the currency gave back its decision-related gains, and it even traded lower against its European counterpart. Remember that yesterday we noted that the meeting could prove positive for NOK, but we also anticipated the gains to stay limited and short-lived. At the time of writing, Norway’s CPIs came out better than expected, enhancing the case for a June hike. That said, for now, we expect NOK to stay sensitive to movements in oil prices, where any extension of the latest slide could bring the currency back under selling interest, despite a hawkish Norges Bank.
DAX – Technical Outlook
The German DAX has been on a slide from the first days of May, when the index reached the 12455 level and then reversed to the downside. The price already managed to test the psychological 12000 barrier and even fell a bit lower. But the index rebounded and is now back above the 200 EMA on the 4-hour chart, almost testing the short-term downside resistance line taken from the high of May 3rd. As long as DAX continues to trade below that downside line, we will remain somewhat bearish. That said, further down the road, the downside might get limited due to the medium-term upside support line drawn from the low of December 27th.
A drop below the 12030 hurdle and the 200 EMA could send DAX a bit lower, towards the 11955 zone, marked by yesterday’s low. If the price depreciation continues and the index breaks below that 11955 zone, this might clear the path towards the 11830 hurdle, marked by the low of April 9th. This is where the index could meet the aforementioned upside support line, which if remains intact could be seen as a bouncing area for DAX.
On the other hand, a push back above the 12145 area could make the bears worry over their chances of driving the index lower in the short run. If DAX continues to rise and breaks above the 12215 barrier, those chances might disappear for a while, as more buyers might start coming in and lead the price to the 12320 hurdle, which is the high of May 7th. We may see a small correction back down from there, but if the sellers are not able to push the index below the 12215 zone, the bulls could pick up on that and drive DAX higher again. If this time the 12320 level is just seen as a temporary obstacle, a break of it could send the index towards the 12405 barrier, or even the 12455 hurdle, marked by the high of May 3rd.
USD/JPY – Technical Outlook
After the reversal on April 24th, USD/JPY moved lower, broke the medium-term upside line and kept on sliding, eventually falling slightly below the March low, near 109.70. Yesterday, the pair did find good support near the 109.46 area, from which it rebounded and travelled all the way back to the psychological 110.00 zone, where the rate got held again. Given that USD/JPY is already quite oversold on the 4-hour chart, we will remain cautiously bearish over the short-term outlook and wait for a confirmation break through the recent low, before examining the possibility of seeing further downside.
A rate-drop below the 109.46 hurdle, marked by yesterday’s low, could confirm a forthcoming lower low and send the pair towards the 109.13 zone, which is the low of January 29th. At some point we may see a small correction back up, but if the bears are still feeling stronger, another slide may bring USD/JPY slightly below the 109.13 obstacle, to the 109.00 level, marked near the intraday swing highs of January 31st and February 1st.
Alternatively, a strong push back above the 110.00 barrier could invite some more buyers back into the game, as such a move might increase the pairs chances to rise a bit more. This is when we will examine the 110.27 hurdle again, a break of which could test the 110.55 area, marked by the intraday swing low of May 6th. If the rate-acceleration doesn’t end there, this may lead USD/JPY to test the short-term downside resistance line taken from the high of April 24th.
As for Today’s Events
During the European day, we get the first estimate of the UK GDP for Q1. Expectations are for economic growth to have accelerated to +0.5% qoq from +0.2%, something that will drive the yoy rate up to +1.8% from +1.4%. Industrial and manufacturing production for March are also due to be released, with both the yoy rates expected to have risen to +0.5% and +1.3% from +0.1% and +0.6% respectively. The case is supported by the manufacturing PMI for the month, which rose to 55.1 from 52.1.
Following the rebound in in the Chinese, US and Eurozone’s growth rates, such data would signal that the UK is following suit despite the uncertainty surrounding the nation’s political scene. That said, with the Brexit riddle still unresolved, pound traders have stayed focused on developments surrounding that front. With news headlines suggesting that talks between the UK government and the opposition Labour party are unlikely bear fruit any time soon, we believe that any GBP gains following the aforementioned data are likely to stay capped.
In the US, inflation data for April is due to be released. Both the headline and core rates are expected to have risen to +2.1% yoy, from 1.9% and 2.0% previously. However, bearing in mind that the PPI rates for the month, released yesterday, held steady instead of rising as the forecasts suggested, we see the risks surrounding the CPI forecasts as tilted to the downside, perhaps for both the headline and core rates to stay unchanged as well.
Even if they rise in line with expectations, we see it unlikely for market participants to start placing bets with regards to a Fed hike this year. After all, at the press conference following last week’s FOMC decision, Chair Powell noted that the Committee does not see a strong case for moving in either direction. A small rise could just prompt investors to take some of their cut-bets off the table. According to the Fed fund futures, they currently see a nearly 60% chance for interest rates to be lower by year end.
Canada’s employment data for April are also on the agenda. The unemployment rate is forecast to have remained unchanged at +5.8%, while the net change in employment is forecast to show a 10k jobs gain after a 7.2k slide in March. Despite the potential recovery in the employment change, we don’t expect this report to spark hopes over a hawkish shift in the BoC’s forward guidance. After all, officials dropped their hiking bias just at the latest meeting and noted that they will “evaluate the appropriate degree of monetary policy as new data arrive”. Since then, the only top tier data we got was Canada’s monthly GDP rate for February, which came in at -0.1% mom, something that makes it even more unlikely for officials to start thinking about hikes again soon.
With regards to the speakers, we have three on today’s schedule: Fed Board Bovernor Lael Brainard, Atlanta Fed President Raphael Bostic, and New York Fed President John Williams.
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