Daily Market Pulse

US-China relations push USD higher


The USD is trading higher this morning as traders concerns rise over US-China relations and uncertainty over Hong Kong’s future as an international financial hub. The equity markets in Asia all traded lower overnight and that has spilled over to Europe. DOW Futures are pointing towards a lower opening as well after closing down 100 points yesterday. China confirmed overnight that it will be imposing new national security laws in Hong Kong that will ban any sedition, secession, or subversion of the government that is run by the Chinese Communist Party. President Trump has said "if it happens, we’ll address the issue very strongly”. China has been urged to “honor its commitments and obligations in the Sino-British Joint Declaration”, which guarantees Hong Kong a high degree of autonomy until at least 2047. The moves by China will no doubt create problems for China as an international money center. This situation has once again seen traders move into the USD as a safe-haven trade. In other news, jobless claims came in as expected, with another 2.4 million filings for unemployment. Fed Vice Chairman Clarida said the US economy is “in an uncharted situation right now” and that "we’ll begin to get a better sense of the scenario and the trajectory the economy is on in early fall.” Atlanta President Bostic said the re-opening of Georgia has been a "mixed-bag", and reiterated concerns over a second pandemic outbreak. He also said that he’s not a big fan of negative rates. Lastly, US Treasury yields are slightly lower this morning with the 10-year trading at 0.6688% and the 30-year bond down at 1.3828%. 


EUR/USD has moved lower overnight as traders follow the US-China saga and technical momentum to the topside has all but disappeared. EUR has tested some support levels and is currently trading near the bottom of the overnight range. According to the German Finance Ministry, the coronavirus pandemic had a high effect on government tax revenues in April. Tax revenues declined 25.3% in April from a year earlier totaling EUR39 billion. This report has put pressure on the EUR as well. Traders are awaiting the release of ECB meeting minutes, which are expected to shed some light on conversations regarding further stimulus. These minutes are from a meeting held before the German constitutional courts ruled that the ECB bond-buying was partially illegal. Coronavirus cases and deaths remain at low levels as Europe’s largest countries gradually open. There are expected protests from some countries this weekend that the re-opening has not gone as quickly as they would like. EUR is expected to trade lower during the North American trading day.


GBP/USD is trading lower this morning after UK retail sales fell 18.1% in April, worse than the 16% expected. This news pushed the pound below the 50 day moving average and technical indicators are now pointing the cable lower. Added to the pound’s woes, was a surge of 856,500 in jobless claims and a fall in inflation of 0.8% yearly. As the economy remains under pressure, the GBP is looking to trade lower. Negative interest rates remain on the agenda as Andrew Bailey, Governor of the Bank of England has made it very clear this topic is under active review. As the Fed continues to reject this policy and the BOE is considering it, the possibility of the divergence in interest rates is weighing on the pound. 


USD/JPY is trading in the middle of its overnight range after the Bank of Japan kept monetary policy unchanged with the short term rate at -0.1%. At their unscheduled policy meeting, the Bank also announced a new Fund-Provisioning Measure to support the financing of small and medium-sized businesses. Zero-interest rates will be offered to financial institutions. The BoJ will also continue to purchase JGBs without any upper limit and will keep the 10-year yield at around 0%. Japan CPI core was announced yesterday and turned negative for the first time since December 2016. Core CPI dropped to -0.2% year-on-year. This data confirms clear downward pressure on prices due to the virus and core CPI is expected to fall deeper into negative territory in the months ahead. Japan’s economic woes are giving traders some second thoughts about safe-haven trades, and USD/JPY should move higher over the trading day.


USD/CAD has moved higher overnight as oil prices fall during the overnight trading period. Brent crude fell $1.56 to $34.50 per barrel, while West Texas Intermediate (WTI) crude fell $1.79 to $32.13 per barrel. There is concern that China’s economic fallout moving forward will hamper fuel demand in the world’s second-largest oil user. As oil is Canada’s main export, negative news tends to push the loonie lower. Bank of Canada governors Poloz said yesterday, “we are in an era where interest rates are probably going to stay low, for demographic reasons and economic growth reasons.” He also said he was optimistic that growth could return sooner rather than later. Canada will release April monthly Retail Sales today and they are expected to fall 10.0% on a month-to-month basis versus the prior release of 0.3%. Technically, USD/CAD has breached several resistance points overnight and is now trading just above the 20-day moving average. Momentum has the pair pointed higher for today’s trading.


As the US-China struggle intensifies, traders are watching developments very closely. Following the conclusion of the China National People's Congress (NPC), the report stated that China pledges to implement the US trade deal. The meeting report also stated that China will improve measures to encourage exchanges with Taiwan, make monetary policy more flexible and appropriate, and keep the Chinese monetary policy stance unchanged. According to Bloomberg, China is planning to raise fiscal spending to boost employment and help contain the economic fallout from the coronavirus outbreak. China is also planning to raise the fiscal deficit target to 3.6% of gross domestic product (GDP) from the previous year's 2.8% and plans to add over 9 million urban jobs in 2020, targeting the surveyed jobless rate of about 6%.


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