FOREX Week Ahead

European and Chinese stocks markets are selling off from critical comments from Beijing that put a dent in trade talk optimism.  Flight to safety is the early morning theme and we may see that continue if we see softer Michigan sentiment and leading index data just after the open.  Safe-haven currencies, the Japanese yen and Swiss franc are outperforming with the early risk averse flows.  Before the open President Trump confirmed the delay of auto tariffs for at least 180 days, that news was heavily priced in and saw a slight bid with equities.

China Speak – Raises concern that talks may not resume

Brexit – Cross-party talks appear done and so is the PM

Spain – 10-year bond yield drops to record low

Oil – What will OPEC + do next?

Gold – No safe-haven appeal today

China Speak

Last night, multiple comments and reports confirmed China was switching to a firm stance on holding off talks until the US changes tactics.  China foreign minister Lu Kang reiterated China’s frustration with the US measures on Huawei and the effect to 5G going forward.  He added that China will take necessary measures to safeguard its rights and interests.  The foreign minister also confirmed earlier reports that no details exist on a Trump -Xi meeting.

The Editor-in-chief of the Global Times Hu Xijin tweeted, “The US Commerce Department put Huawei on its Entity List, making trade war more like a real ‘war’. Trade talks have been stuck in deep shock. The Chinese are more convinced concessions won’t bring peace. The only way for China is to strengthen independent research & development.”

A Chinese Communist Party Official stated a trade war could reduce China’s growth by 1%.

The onshore yuan fell to the weakest levels since December.

Brexit

The British pound continues to fall against all its major trading partners as Theresa May’s premiership nears an end.  Labour’s abandonment of talks pretty much cements the end of May’s deal getting pushed through.  Despite the high likelihood of her not delivering Brexit, she remains committed to put her bill up for one final vote.  She is considering the next step of indicative votes, but that probably does not matter as Labour is set on not working with a government that is about to collapse.

Former Foreign Secretary Boris Johnson will be one of the favorites to replace May, but regardless of who takes over, they will still have the same deadlock that May is dealing with.  Brexit is poised to drag on longer than anyone wants.

Spain

Spain’s economy has outperformed in Europe and investors are viewing Spanish bonds as a safer investment versus the rest of the periphery.  Spain’s 10-year yield fell to fresh record lows of 0.861% before settling back around the 0.863 level.  Spain’s bond market has provided investors with great yield for what was once considered one of the riskiest investments.

Italy’s 10-year yields came down sharply as markets appreciated the Deputy Prime Minister Di Maio’s de-escalation of his coalition partner Salvini’s comments that Italy will break the EU fiscal rules.  Di Maio noted that nobody wants to go 140%, otherwise debt-to-GDP level would be out of control.

The euro is mixed against the majors with the biggest declines to the Japanese yen.

Canadian Dollar Lower Despite Reaching Metal Tariffs Agreement With US

The Canadian dollar lost 0.22 percent this week. The loonie had a volatile five days as the US decision to reach an agreement on aluminium and steel tariffs was a positive for the currency alongside rising oil prices. Negatives came in the form of global trade and growth uncertainty. Escalation of rhetoric if not tariffs from both sides are reducing optimism that before the G20 meeting next month the two biggest economies can hammer out a deal.

Next week’s economic calendar in Canada will be low on events. Retail sales data on Wednesday, May 22 is the most relevant, with a 0.8 percent gain expected. Canadian data has been mixed with the employment report giving a huge boost to the loonie that will probably not be repeated in the short term.

The US dollar rose against all major pairs in the last five trading sessions. The Trump administration delayed or resolved trade issues with Europe and North America to focus on China and with that increased the appeal of the greenback as a safe haven. England’s leadership uncertainty hurt the pound while connections to the Chinese economy depreciated the currencies of New Zealand and Australia. Comments out of Italy have put downward pressure on the single currency as eurosceptic ideology is on the rise.

Pound Falls After Cross Party Brexit Talks Collapse

The British pound lost 0.53 percent on Friday and 2.11 percent on a weekly basis after Brexit talks between the Labour and Conservative parties broke down. Optimism on a positive Brexit outcome was short lived as members of the two political parties could not agree on the way forward together. Prime Minister May is facing internal pressure to step down, but the uncertainty on who her replacement could be is further pushing the currency down.

PM May remains committed to her proposal and will try to get a vote on it in June. A vote of no confidence could rob her of that opportunity and instead give rise to a eurosceptic Prime Minister in which case no-deal probabilities resurface. After the initial Brexit delay the divorce seemed to be called off, but this last push for separation will be decisive either way.

OIL – Energy Keeps Rising on Middle East Turmoil

Energy prices rose close to 2 percent in the last five days as tension in the Middle East showed no signs of easing. Disruptions to supply, either from the OPEC+ and their output cut agreement or due to political sanctions, weather and military actions have pushed prices more than 30 percent year to date. The fact that demand has not grown at the same rate, and there has been a significant ramping of production in the US highlight the fact that the market has been hyper focused on geopolitics while supply demand fundamentals have taken a back seat.

Trade war concerns have limited the rise of crude, as a tariff escalation would be negative for global growth. Energy demand would drop but so far the White House continues to be hopeful a deal can be reached, even as it is confident it would come out ahead of a full out trade war with China.

OPEC+ producers will meet in Saudi Arabia to discuss the fate of the product output cut agreement. The deal signed by OPEC members and other major producers such as Russia has been the main factor stabilizing prices after crude went on free fall in 2014. The marketshare play by OPEC led to oversupply so a correction was needed. Saudi Arabia led the talks that culminated on a plan to soak up excess production. This meeting will be the preamble of the June meeting in Vienna where the fate of the deal will be announced.

Current prices have been boosted by geopolitical disruptions and there are rising concerns that prices could be deemed appropriate for some members to opt out of the deal and start increasing production. US shale operations have ramped up operations and oversupply could once again be a concerns, although not one of President Trump that has openly advocated for lower crude prices.

GOLD – Dollar Replaces Gold as Top Safe Haven

Gold fell 0.66 percent as the White House decided to focus on China by delaying global auto tariffs and reaching an agreement on aluminium and steel tariffs with Canada and Mexico. The move on the trade front made the dollar the de facto safe haven as China countered by saying the US is trying to bully it into submission. The yellow metal fell as investors flocked to the greenback awaiting more developments as the battle between the two largest economies is set to continue.

US data and Fed speakers have been mixed leaving the U.S. Federal Reserve to keep on pause and await the data for signs of improvement. The Fed minutes to be released will bring details on how dovish Fed members are, but from the statement we know that a rate hike is unlikely to happen in 2019. A rate cut in the other hand has been rising in probability as disappointing data and geopolitical anxiety could be signalling lower growth than expected.

Source: marketpulse

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