The Aussie is the clear winner, boosted by the friendly outcome of the Australian national election, where the coalition government won with what appears to be a parliamentary majority.
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There is a clear winner as the week gets underway, and that's the Aussie, boosted by the friendly outcome of the Australian national election, where the incumbent coalition government won with what appears to be a parliamentary majority. On the other side of the spectrum, we find the Yen, losing value even as the US-China trade rhetoric worsens, which is why the current hefty levels in JPY crosses look quite rich if one accounts for such an unsettling backdrop. Another commodity-linked currency, as the AUD, recently enjoying a lift is the Loonie (CAD), as the US agreed to lift the steel and aluminum tariffs as part of the US-Mexico-Canada trade agreement. The USD performance, partly driven by the consistent selling on the heavily traded European currencies, especially the Euro, continues to show no signs of abating. The overall risk profile in financial markets has relaxed quite a bit even if judging by the levels the Chinese Yuan trades at, the fundamental backing to justify such a recovery in risk is dubious at best.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The Australian Dollar has found strong bids in pre-market Intermarket trading after the incumbent coalition government was proclaimed as the winner of the Australian national election by a sufficient margin not only to defy the odds of the polls (recurrent pattern these days) but to likely enjoy an outright majority (76 seats needed).
AUD traders await a crucial public intervention by RBA Governor Lowe, due to speak at lunchtime Australian local time on Tuesday, on the prospects of the economy and policy. The RBA minutes from the latest policy decision will also be released tomorrow Australian morning time to shed further light on the RBA thinking process.
China has reinforced its stance on the current trade talks impasse, by noting via its state-sponsored economic daily blog on Wechat, that “we can’t see the US has any substantial sincerity in pushing forward trade talks. Rather, it is expanding extreme pressure.” China has laid out three conditions to make progress in the trade front, including the removal of the existing trade tariffs, a realistic purchase plan, and a balanced text as part of the agreement.
Despite US President Trump announced a 180-day delay in the auto tariff hikes to EU, Japan last Friday, the US Commerce Department has determined that auto imports represent a threat to national security. Counter-balancing the news, the Trump administration has decided to dial down the tensions with its neighboring countries by lifting the steel and aluminum tariffs on Mexico and Canada, which should allow Congress to ratify the trilateral trade agreement.
US prelim UoM consumer confidence, published last Friday, posted its highest level in over 15 years, which is yet another testament that the prospects by consumers to spend in the real economy are extraordinarily strong, as the labor market remains overly tight.
Plans are in the making for the UK parliament to vote, once again, on a Withdrawal Amendment Bill during the week of June 3rd, Meanwhile, UK PM May has stated that she hopes her new improved set of measures as part of the divorce agreement wins new support. The Sterling price action, very bearish the last 2 weeks, has been manifesting the continuous uncertainty that surrounds the Brexit process, with no clarity gained in the last month.
US President Trump has ramped up his rhetoric against Iran, noting that “if Iran wants to fight, that will be the official end of Iran. Never threaten the US again.” The market does not perceive this geopolitical risk to escalate further from here, which is why markets are not responding.
Keep close attention to USD/CNH, as it remains the center of the financial universe. If the 7.00 handle gives in, it will send a very dire signal for the risk profile. It's worth noting though, there have been indications that the PBOC (China's Central Bank) has started to manipulate the exchange rate via its fixing and intervention to ease the Yuan pressure a tad. As Nordea notes, a move through 7.00 "would make Chinese assets suffer massively as would the growth momentum in Asia."
Recent Economic Indicators & Events Ahead
RORO (Risk On, Risk Off Conditions)
The strong depreciation in the Yen index looks set to be limited in nature if one judges the soggy price action seen in equities and bonds in the last 24h. For the Yen to sustain its current losses and risk to substantially improve, a lot more work needs to be done in reverting back to bullish micro slopes in both the S&P 500 and the US 30y bond yields.
It’s quite rare to witness the JPY index move into bearish territory from a micro perspective, yet both equities and bonds trade in a rather suppressed manner by failing to extend last Thursday’s gains. Something's got to give, and judging by the market disparities, it’s the Yen that looks out of whack here.
Meanwhile, the DXY ascent continues at a slow but steady pace, printing 5 days of gains in a row. The poor performance in Chinese equities, using the Shanghai Composite as a reference, alongside the hefty levels in the USD/CNH, will do little to soothe the nerves of investors.
Overall, the RORO model is far from offering reassuring metrics that the ‘risk on’ profile is set to expand much further. This view is also anchored by the notion that the latest rhetoric in the US-China trade front has, if anything, has taken a turn for the worse, with China re-considering what’s the point of having more talks near term.
Latest Key Developments In FX (Technicals, Fundamentals, Intermarket)
EUR/USD: Bears Dominant Force, Watch Compression At The Lows
GBP/USD: Consistent Selling Respecting the 25HMA
USD/JPY: Set To Reach An Interim Top Intraday
AUD/USD: Emboldened by Aus election outcome, clear target overhead
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