Analytics, News, and Forecasts for CFD Markets: currency news — 02-07-2019.

Danske Bank analysts believe that China's PMIs are set to remain weak in the short term, but they see no sign of a hard landing.

• “On the other side of a trade deal, the economy should recover again.
• Leading indicators are a bit mixed:

1. Lower yields still point to a lift to home sales. Construction also supported by low inventories.
2. Metal prices have softened but not collapsed.  Points to weakness but not a sharp slowdown.
3. Credit impulse stable but not yet recovered.
4. PMI exports have weakened again. Global slowdown and trade war cause strong headwind.

• Policy outlook:

1. The re-escalation of the trade war caused new headwinds. Despite a ceasefire, we expect talks to be difficult leaving uncertainty in place for some time. We expect a deal to be struck at some point in H2.
2. We expect a cut in the Reserve Requirement Ratio, more targeted lending and more consumer stimulus.

• Chinese market outlook:

1. Chinese stocks are capped for now by trade war uncertainty. Long term, we are positive.
2. We expect USD/CNY to move higher before turning lower when a trade deal is in sight.”

• Previous talks are the basis of current negotiations, it will take time to get it right
• Lower rates at the Fed would help the stock market
• Hope the Fed will lower rates going forward

• Global trade tensions increase downside risks
• If Brexit progresses smoothly, limited and gradual interest rate rises would be needed
• MPC will explore in August inflation report how to show interest rate, sterling and other asset price sensitivities in event of Brexit deal

Jane Foley, the senior FX strategist at Rabobank, notes that on a five day view the JPY is the second worst-performing G10 currency after the CHF but in the year to date, the JPY remains the second best-performing G10 currency after the CAD, giving a truer reflection of the geopolitical and economic clouds that have been gathering over global markets this year. 

• “We expect investors to remain mostly cautious and thus we see scope for the JPY to hold firm in the months ahead.
• Despite the poor performance of Japan’s external sector, GDP expanded by an annualized 2.2% (+0.6% q/q) in Q1 on the back of robust capital spending. That said, looking ahead both weakness in exports and in the consumer sector threatens to weigh on growth.
• In view of the headwinds to growth there is little risk that the BoJ will steer away from its ultra-accommodative policy settings in the foreseeable future. The weakness of wage inflation suggests little risk of underlying CPI inflation creeping near the Bank’s 2 % inflation forecasts in the months ahead with Japan’s looming tax hike and the weakness of the external section underpinning this view.  While this backdrop may appear to lay out a case for a softer exchange rate, price movements in the JPY are largely determined by the market’s broad levels of risk appetite.  In particular, the JPY is sensitive to geopolitical events.
• Looking ahead the JPY would likely soften if a trade pact was agreed between the US and China. However, with more rhetoric from Washington focussing on the need to ‘contain’ the growth of China as both an economic and military power, it seems likely that tension between the two nations will persist in some form for a while.
• This backdrop combined with expectations for slowing world growth are likely to underpin the JPY.  We expect USD/JPY to be trading in the 108 region at the end of the year and see risk of a drop towards 107.0 on a 1- to 3-month view if a trade deal is not signed in this period.”

June’s data released by IHS Markit on Tuesday signaled another difficult month for the Canadian manufacturing sector. 

According to the report, the seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers’ Index (PMI) edged up to 49.2 from May's 41-month low of 49.1.

Economists had expected the reading to drop to at 49.0. 

A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. 

According to the report, a sharper decline in production levels was the main factor weighing on the headline PMI in June. The downturn in output accelerated since the previous month and was the fastest since December 2015.

Bill Diviney, the senior economist at ABN AMRO, notes that the agreement to hold off on further tariffs while negotiations on a U.S.-China trade deal resume is a positive development, and there was scant detail on how (if at all) the differences between the two sides have been bridged since the last time talks broke down in early May.

• “We continue to think much of the damage from the trade war has been done in terms of the sharp fall in global business confidence. Given the unexpected twists and turns in the trade war so far, we think businesses will be reluctant to assume a wholesale resolution to the dispute in their investment plans. As a result, we expect business confidence to remain cautious in developed markets, and for investment to be weak over the coming quarters.
• Indeed, this was confirmed today by the US ISM manufacturing PMI, where the forward-looking new orders index fell to the lowest since end-2015. In China and other emerging markets – where the direct effects of tariffs are more significant – the removal of the imminent threat of tariff increases could be more of a support.
• As a result, we continue to expect central banks to cushion the blow to confidence by easing monetary policy over the coming months, starting with the Fed, which we expect to cut rates by 25bp at the 30-31 July FOMC. Having said that, the truce reduces the chances of a 50bp cut, though that was already looking unlikely following St Louis Fed president Bullard’s comments last week.
• OIS forwards now price in 31bp of cuts for July, down from 33bp on Friday, and as much as 37bp this time last week (i.e. a 25bp cut is fully priced, with 50bp 62% priced). For the ECB, we continue to expect two 10bp rate cuts in September and Q1, and the relaunch of asset purchases to be announced before the end of the year.”

• Says OPEC+ supports using 2010-2014 period for oil reserve metrics
• OPEC+ is discussing several metrics to measure inventories
• 2010-2014 inventory metric should consider gains in demand

• Says OPEC has agreed on draft cooperation charter with OPEC+
• Says 9-month extension is to prevent 100 million barrels build-up
• Says that all countries have promised to improve on compliance to cuts

Arjen van Dijkhuizen, the senior economist at ABN AMRO, notes that the results of the Trump-Xi meeting in Osaka were more or less as expected, although the easing of Huawei sanctions by the U.S. was a positive surprise.

• “For the Chinese economy, it does make quite a difference whether USD 250bn of exports to the US is levied by 25% (current reality) or more than double that amount (threat). So, despite all the damage done already through the trade conflict including through indirect effects, the agreed truce takes away some headwinds for the Chinese economy at least for now – with an imminent threat gone for the time being. That said, given the weakness of the latest incoming data (partly reflecting drags from the trade conflict) we will look for further confirmation before considering further changes to our forecasts.
• In the meantime, Caixin’s manufacturing PMI for June joined its NBS equivalent in June by falling back below the neutral 50-mark today – both indicators are now at 49.4.”

• Says SNB has seen some nervousness and pressure on the franc
• Exchange rate markets remain fragile
• Says SNB will stick to expansionary monetary policy
• Inflation in Switzerland remains subdued
• Says SNB stands ready to intervene to reduce the attractiveness of the franc

Deutsche Bank's analysts note that the UK’s manufacturing PMI slumped to 48.0 last month versus expectations for a 49.5 reading and is also a drop of-1.4pts from May and the lowest reading since February 2013.

• “The details showed that output fell and new orders remained in negative territory too. In fact, most of the sub-indices were lower with the associated text noting that “the stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history”.
• Our UK economists noted that current levels are now consistent with prior BoE easing so this will likely increase the scrutiny of the BoE maintaining a tightening bias in the communication. We should also note that consumer credit data for May also slipped yesterday to £0.8bn. Sterling fell -0.46% yesterday while 10y Gilts ended -1.9bps lower.”

Analysts at TD Securities note that the UK’s construction PMI tanked in June, declining from 48.6 to 43.1, its lowest level since April 2009.

“The main source of downward pressure was political and economic uncertainty, with Brexit still looming and a new Conservative party leader and prime minister on the horizon. As a result, we've downgraded our forecast for tomorrow's services PMI, and now look for it to print below 50.”

Bloomberg reports, citing officials familiar with the matter, that the European Central Bank's (ECB) policymakers are not quite ready to rush into any additional monetary stimulus at this month's meeting, preferring instead to wait for more data on the economy.

• RBA is prepared to adjust interest rates again if needed
• Will closely monitor how things evolve over the coming months
• Board is aware that there are some downsides to lower rates
• Sees options other than monetary easing, including fiscal support
• Says AUD TWI at bottom-end of the range, helping to support the economy

Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, suggests that even though an Aug RBNZ cut is mostly priced in, they receive Aug RBNZ OIS at 1.31%, consistent with TD’s new revised RBNZ cash rate profile (Aug 1.25%, Nov 1%).

“After the RBNZ indicated that 'a lower OCR may be needed over time' in its statement last week (Wed), we got a downbeat print on ANZ's Business Outlook Survey (Fri) and this morning we received a very poor read on business confidence, with the NZIER's Quarterly Survey of Business Confidence plunging to its lowest levels in 10yrs.”

“The RBNZ highlighted 'subdued business sentiment' as dampening domestic spending in last week's statement, so in the wake of these prints, the odds of downgrades to the RBNZ's forecasts are now higher. Today's NZIER reports suggests annual GDP growth to be below 2% in H2'19 in contrast to current RBNZ MPS forecasts that have annual growth running at 2.5%/2.6% in H2'19.”

Incoming orders and real production in mechanical engineering have slowed down considerably in the first few months of the  year, and looking forward does not promise any improvement. "Therefore, a revision of our forecast is unavoidable; we now expect production to fall by 2 percent in real terms in 2019," explained VDMA President Carl Martin Welcker in a press conference. This revision is necessary despite the high order backlog, which was sufficient for 8.5 months in April. This is because this backlog is unevenly distributed across companies and industries and cannot completely cushion the sharp drop in incoming orders till the end of the year. Previously, VDMA economists had assumed a slight increase in production of 1 percent for the year as a whole. 

In the first four months of the current year, mechanical engineering production stagnated in comparison with the previous year. According to preliminary figures, in April it was 0.8 percent below the previous year's figure. In the first five months of the current year, order intake in the mechanical engineering sector was 9 percent lower than in the previous year. Capacity utilisation still reached 87.4 percent in April.

Prime Minister Giuseppe Conte said on Tuesday Italy's 2019 budget deficit looked set to fall to 2.04% of gross domestic product, meaning the country was compliant with European Union finance rules.

The European Commission has threatened to launch disciplinary procedures against Rome because it failed to reduce its large public debt in 2018 as promised, and has called on the Italian government to bolster state accounts.

Rome has ruled out any belt-tightening, but the government said on Monday it would be able to cut this year's official deficit forecast of 2.4%, which was set in April, thanks to lower-than-expected spending and higher revenues.

According to estimates from Eurostat, in May 2019, compared with April 2019, industrial producer prices fell by 0.1% in the euro area (EA19) and remained unchanged in the EU28. In April 2019, prices decreased by 0.3% in the euro area and remained unchanged in the EU28. In May 2019, compared with May 2018, industrial producer prices rose by 1.6% in the euro area and by 1.9% in the EU28.

Industrial producer prices in the euro area in May 2019, compared with April 2019, fell by 0.6% in the energy sector and by 0.1% for intermediate goods, while prices rose by 0.1% for capital goods and durable consumer goods, and by 0.2% for non-durable consumer goods. Prices in total industry excluding energy remained unchanged.

In the EU28, industrial producer prices fell by 0.3% in the energy sector and by 0.1% for intermediate goods, while prices remained unchanged for durable consumer goods, rose by 0.1% for capital goods and by 0.2% for nondurable consumer goods. Prices in total industry excluding energy rose by 0.1%.

June data IHS Markit/CIPS revealed a sharp loss of momentum for the UK construction sector, with business activity and incoming new work both falling at the fastest pace for just over 10 years. The slide in construction demand was mainly attributed by survey respondents to risk aversion among clients in response to heightened political and economic uncertainty. 

The headline seasonally adjusted UK Construction Total Activity Index posted 43.1 in June, down sharply from 48.6 in May and below the 50.0 no-change mark for the fourth time in the past five months. Moreover, the latest reading signalled the steepest reduction in overall construction output since April 2009. Economists had expected an increase to 49.3.

All three broad categories of activity recorded a decline in output during June. The fall in house building was the largest reported for three years. Commercial work fell for the sixth consecutive month and remained the worst performing area of construction activity. The latest reduction in work on commercial building projects was the steepest since December 2009. Civil engineering activity also declined at a sharp pace in June, with the rate of contraction the fastest since October 2009. 

German companies operating abroad are at their most downbeat since 2015 about the business outlook for the next 12 months due mainly to the impact of trade disputes and protectionism, a survey by the DIHK Chambers of Industry and Commerce showed.

The DIHK's survey of some 4,500 German companies abroad showed just 24% of them saw their business prospects improving in the next 12 months, with 49% seeing no change and 27% a deterioration.

"Trade disputes and growing protectionism in many parts of the world are increasingly becoming reality for German companies abroad," the DIHK said.

In particular, companies in the European Union and North America were increasingly sceptical about the economic outlook for this year, the DIHK said, adding that the situation was slightly more positive in developing and emerging markets.

Danske Bank analysts point out that in Brussels, EU leaders will resume their quest to fill the European top posts after they failed to do so at a marathon summit stretching from Sunday to Monday.

“Discussion continues to centre on the Dutch Socialist lead candidate Frans Timmermans for the Commission Presidency. In the US, we have two interesting Fed speakers: Williams (voter, neutral) and Mester (voter, hawkish). It will be interesting to hear their take on the trade standoff between the US and China and if there are any hints about the July rate decision. Overnight, we get service PMIs in Japan and China. For both countries, it should give us more information about how the domestically oriented part of the economy is doing (although in the case of China the service PMI is quite volatile). Like in Europe, the services sector has been more robust than the manufacturing sector.”

Stocks are surging on the trade truce, but it may be a short-lived rally once investors realize it could take months of tough talks to get to a trade agreement and the risk of more tariffs remains.

Both Bank of America Merrill Lynch and Morgan Stanley say a stock market correction could be in the offing this summer, despite the fact the U.S.-China trade war cooled a bit this weekend.

“We still expect a 10 percent correction during 3Q as this past weekend’s agreement is viewed as a sell the news event,” wrote Morgan Stanley chief U.S. equity strategist Mike Wilson.

At Bank of America, analysts were also skeptical.

“The fact that there was no major breakthrough is consistent with our ‘no pain, no deal’ framework: at the moment the economy and markets are not weak enough to incentivize the US to make compromises,” noted Bank of America strategists.

Karen Jones, analyst at Commerzbank, points out that EUR/USD pair has backed away from the 1.1411 55 week moving average.

“The Elliott wave count is suggesting a small near term retracement into the 1.1265/30 band and beyond this we look for further gains. Above 1.1412 (last weeks high) we look for a test of the 1.1570 2019 high. Slightly longer term we target 1.1815/54 (highs from June and September 2018). Initial support lies at 1.1264/13th May high, ahead of 1.1176 the 7 th March high, which we look to hold. We regard recent lows at 1.1110/06 as an interim turning point and continue to view the market as based longer term and we target 1.1990 (measurement higher from the wedge).”

China will make cuts in banks' reserve requirement ratios and seek to lower real interest rates to help reduce funding costs for small firms, Premier Li Keqiang said.

China's economy is facing new downward pressure, Li said.

But China will keep monetary policy prudent, and there will be no "flood-like" stimulus, Li said.

China's retail sales are expected to have grown 8.2% in the first half of 2019 from a year earlier, a commerce ministry official said.

Chinese retail sales have slowed in recent years, with growth hitting a 16-year low earlier this year due to increased consumer caution amid a trade war with the United States.

Apart from May's surprise slowdown to 7.2%, monthly retail sales growth stayed above 8% in the first half of 2019.

Small businesses in Britain plan the least investment in two years as uncertainty about Brexit drags on, a survey showed.

Nearly three quarters of small firms said they will not increase capital investment over the coming quarter, the survey by the Federation of Small Businesses found.

"It's impossible for small business owners to invest for the future when we don't know what the future holds," FSB National Chairman Mike Cherry said.

Businesses cut back on investment throughout 2018, official data has shown, the longest such run since the financial crisis a decade ago, raising concerns about damage to Britain's long-term growth prospects.

The FSB survey also found the net balance of small firms increasing staff was at a three-year low as employers struggled to find the right candidates with Britain's unemployment rate at its lowest in more than 40 years.

According to provisional data from Destatis, turnover in retail trade in May 2019 was in real terms 4.0% and in nominal terms 4.8% higher than in May 2018. The number of days open for sale was 25 in May 2019 and 24 in May 2018.

Retail trade in food, beverages and tobacco grew by 2.6% in real terms and 3.1% in nominal terms in May 2019 compared with May 2018. Sales in supermarkets and hypermarkets were up 2.9% in real terms and 3.3% in nominal terms on the same month of the previous year. The retail trade in food was up 0.1% in real terms and 1.7% in nominal terms compared with May 2018. 

Non-food retail sales in May 2019 increased 5.1% in real terms and 5.9% in nominal terms compared to the same month of the previous year. Internet and mail order trading recorded the largest increase in sales, with 8.2% in real terms and 8.7% in nominal terms.

Compared with the previous year, turnover in retail trade was in the first five months of 2019 in real terms 2.8% and in nominal terms 3.5% higher than in the corresponding period of the previous year.

When adjusted for calendar and seasonal variations, the May turnover was in real terms 0.6% and in nominal terms 0.4% lower than in April 2019.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1454 (2587)

$1.1411 (3515)

$1.1362 (4516)

Price at time of writing this review: $1.1289

Support levels (open interest**, contracts):

$1.1247 (2766)

$1.1198 (3049)

$1.1149 (3517)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date July, 5 is 70926 contracts (according to data from July, 1) with the maximum number of contracts with strike price $1,1300 (4516);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2804 (1228)

$1.2760 (658)

$1.2724 (348)

Price at time of writing this review: $1.2637

Support levels (open interest**, contracts):

$1.2591 (1396)

$1.2546 (2042)

$1.2499 (2222)

Comments:

- Overall open interest on the CALL options with the expiration date July, 5 is 17138 contracts, with the maximum number of contracts with strike price $1,3000 (2646);

- Overall open interest on the PUT options with the expiration date July, 5 is 16185 contracts, with the maximum number of contracts with strike price $1,2500 (2222);

- The ratio of PUT/CALL was 0.94 versus 0.94 from the previous trading day according to data from July, 1

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.