Head of FX Strategy, Saxo Bank Group
Summary: The Trump administration seems to have tripped over its own policy moves as it suddenly announced 90-day “exemptions” to its Huawei export ban after US tech companies said they would halt doing business with the company.
After placing Huawei on the Entity List that requires special permission for any US company to sell their goods to the company, a swathe of US tech giants immediately announced a cessation of doing business with the company to comply with the rules. The sudden announcement overnight of temporary 90-day “exemptions” for Huawei overnight suggests that the US is making up policy as it goes along and not considering the consequences of its actions.
On the one hand, the move suggests a de-escalation of the temperature – hence the modest bounce in risk appetite overnight. On the other hand, China has mobilised a robust and comprehensive defiant stance and may have decided that the Trump administration is too unreliable and that China is willing to tough things out until it is the US side that caves significantly on demands. (Given Trump’s obsession with the level of the stock market, although this is a risky game of chicken for both sides.)
Signs that China may prefer to keep the relationship on ice include the drumming up of nationalist rhetoric in the popular press and Xi Jinping’s visit to a rare earth minerals miner yesterday, which many see as a possible hint that the next escalation could include a Chinese ban on exports to the US of rare earth minerals – key in many high tech and military applications. China supplies some 85% of global rare earth production.
In Australia, a speech from Reserve Bank of Australia governor Philip Lowe raised the odds of a June rate cut to a near certainty as he pointed to an inclination to cut. His speech included loud hints that he would like to see the government consider the opportunity to kick in with some Keynesian stimulus to offset downturn risks, given that funding will be cheap due to low rates:
"In the event that the unemployment rate does not move lower with current policy settings, there are a number of options," Dr Lowe said. These include: further monetary easing; additional fiscal support, including through spending on infrastructure; and structural policies that support firms expanding, investing and employing people. Relying on just one type of policy has limitations, so each of these is worth thinking about."
The Morrison-led coalition government has maintained a strict balanced budget stance and has even promised a strong surplus next year – a promise that will have to be broken if Australia is heading for a recession.
Staying short AUDUSD for a look below the 0.6827 cycle lows from back in early 2016 and dropping stops to below 0.6950.
Short EURUSD via short-date options near the money for a go at 1.1000 within a month.
AUDUSD trying the recent lows and, the early January flash crash aside, is eyeing the lows from early 2016 below 0.6830 (lower dotted line on the chart) soon. Volatility remains incredibly constrained – likely by the assumed USDCNY cap – and the RBA has ticked about every dovish box it can tick here so further AUD downside would need other sources of fuel. The highest octane fuel would be a USDCNY move above 7.00, but barring that a fresh deterioration in risk appetite and iron ore prices are two candidates.
USD – the greenback strength persists and USDCNY trading back toward the cycle highs – really only looking for range expansion to pick up if China moves away from its policy of maintaining the CNY floor.
EUR – EURUSD drooping toward the cycle lows – the last two break attempts were rapidly corralled, and this one may be too – or at least not yield to a notable pick up in momentum – without CNY shaking loose of its established trading range.
JPY – long US treasuries caught in a very narrow range, and guess what – so is USDJPY. The JPY’s only hope for upside is risk misery and lower yields and downside only arrives via the opposite – rising risk sentiment and rising yields. At least until we see more policy dynamism from the Bank of Japan or Abe government.
GBP – weakness as we await the size of the Brexit party’s result at the EU parliamentary elections. The 1.2500 area in GBPUSD is the next test for that pair, while EURGBP is nearing its 200-day moving average here ahead of 0.8800.
CHF – absorbing safe haven flows that may be a function of sterling weakness and euro weakness ahead of the EU parliamentary elections – a battle awaits at 1.1200 in EURCHF if the Swiss National Bank is to make good on intervention promises.
AUD – the Aussie struggling and remains vulnerable to further downside if markets decide that a US-China trade deal is receding further over the horizon (market pricing of equities and various other risk measures suggest staggering complacency in my view).
CAD – the loonie correlating with USD direction in the crosses and showing relative firmness as US drops tariffs on steel and aluminium. As well, longer term the market may be eyeing a Trudeau defeat at the October elections and rolling back of his government’s carbon taxes by a Scheer-led Conservative government.
NZD – the Q1 retail sales up tonight. The lack of more significant downside in AUDNZD on the dovish RBA overnight suggests underlying NZD weakness (makes sense as RBNZ set to track RBA in cutting rates in the coming year if inflation fails to pick up in NZ).
SEK – support in EURSEK found well ahead of the key 10.60-65 downside pivot area. More downside risk for SEK correlates with concerns for the economic outlook in EU and globally.
NOK – the krone could prove vulnerable to a test lower if crude oil prices drop – further steepening in backwardation in crude oil suggests long term demand concerns are rising.
Upcoming Economic Calendar Highlights (all times GMT)
1000 – UK May CBI Trends Total Orders
1400 – US Apr. Existing Home Sales
1445 – US Fed’s Evans (Voter) to speak
1600 – US Fed’s Rosengren (Voter) to speak
2245 – New Zealand Q1 Retail Sales