Daily Market Pulse

USD remains under pressure as US-China tensions mount

6 minute read


The USD remains under pressure this morning as traders are welcoming news regarding lockdown exits and the possibility of Coronavirus vaccines. However, there is a concern regarding US-China tensions over Hong Kong. President Trump has indicated that he will be announcing something very powerful by the end of the week. A report from Bloomberg News said that the Trump administration was considering sanctions on Chinese firms. The DOW closed almost 530 points higher yesterday as all the US equity markets were higher. This morning, DOW Futures are up indicating an opening of around 300 points higher later today. The possibility of a vaccine to combat the virus, as well as better than expected economic numbers, has traders in a positive mood. US new single-family home sales rose in April to 623,000, higher than the estimated 490,000 and Consumer Confidence rose to 86.6 in May, up from 85.7 in April, beating an economist poll of 82.3. US Treasury yields moved lower overnight, reacting to the possibility of sanctions by the US on China. While equity investors have focused on the re-opening of the economy, bond traders seem more concerned with US-China relations. The yield on the 10-year note was lower at 0.6900%, while the 30-year bond also was trading slightly lower at 1.4327%. 


EUR/USD is trading near the top of its overnight range. The reaction to comments from ECB President Lagarde seems to indicate the market was expecting harsher comments than what has been said. According to President Lagarde, the Eurozone economy is likely to contract “along the lines previously outlined in the bank’s medium to severe scenarios.” The severe scenario sees a 12% GDP decline, while the medium scenario is for an 8% decline. According to reports from those at the Q&A session, Lagarde did not say anything particularly concerning about the markets. This has prompted traders to buy the EUR and the single currency, breaking above previously testing resistance levels. Speculation will now center on next week’s ECB meeting. The ECB may decide to expand its special Pandemic Emergency Purchase Program (PEPP) to EUR 1 trillion from the current EUR 750 billion. Covid-19 statistics continue to decline across the continent as countries gradually re-open their economies. It will be interesting to see how far traders look to take the EUR or if it fails once again at key resistance levels.


GBP/USD is also trading near the top of its overnight range. Two items seem to be affecting the movement of the pound at present. Hopes for a Brexit deal are supporting the pound, while the Cummings scandal is pressuring the pound. To this point, “Brexit” is winning, as cable is enjoying some positive upside technical momentum on the four-hour chars and RSI falls below the overbought 70 level. EU-UK discussions regarding fishing rights have turned somewhat positive for the UK and while this industry is rather small the fact that there has been some agreement is carrying some substantial political weight. The negative factor here is Cummings, who for the moment has PM Johnson’s backing, despite calls from Conservative Party members for his dismissal. PM Johnson’s approval ratings have taken a hit from this development. The topic of negative interest rates continues to find newswires, as Andy Haldane, the Chief Economist for the Bank of England, stated that sub-zero rates were not close to happening. Although originally he was quoted as being in favor of negative rates. The pound reacted positively to his comments. As long as the market mood remains positive, the pound could move higher on Brexit hopes. The Cummings scandal, while significant is expected to fade quickly.


USD/JPY is lower this morning, though trading near overnight highs as worsening US-China relations have benefitted JPY with safe-haven traders re-emerging. Failure to take out technical resistance levels also saw the USD/JPY reverse and trade lower. Diplomatic tensions between the US and China will continue to weigh on the USD/JPY. As the markets await the reaction of President Trump, China was quick to retaliate to his comments threatening countermeasures against the US. These comments are what prompted the safe-haven buying. Technically the USD/JPY is trading below the 50, 100, and 200 moving day averages and a break of the overnight lows could see renewed USD/JPY selling. During a press conference this morning, Japanese Chief Cabinet Secretary Yoshihide Suga said the Japanese government is strongly concerned about the situation in Hong Kong. As tensions continue to rise, expect the USD/JPY to continue lower as more traders will look to safe-haven trades.


USD/CAD is also trading lower this morning, even though oil prices were lower overnight. Brent crude fell $0.21 to $35.96 per barrel overnight, while US West Texas Intermediate crude fell $0.31 to $34.04 per barrel. There were trader concerns as to how quickly demand for fuel will occur once the lockdowns begin in many countries and US-China tensions added to the negative sentiment. Canada is expected to report an annualized fall of 10% in Q1 GDP, not as bad as expected, but not as good as hoped for. This first-quarter contraction is expected to be between what the US and Europe had experienced. The US economy contracted by 4.8% in Q1 and the fall in oil prices over the period is why economists expect the fall in Canadian GDP to double that of the US. Many economists are expecting the GDP number to show single-digit contraction and that is what seems to be supporting the loonie at the moment. This would show the Canadian economy survived the worst and is ready to recover. A number much higher than 10% would be negative towards the currency showing the economy has a worse reaction to the shutdown.


How will China react to President Trump’s announcement? The new national security law is expected to be passed tomorrow although it is widely seen as a violation of the “one country, two systems” principle and jeopardizes Hong Kong’s global status. Protests continue in Hong Kong as citizens protest the new national anthem bill, which deviates from the good traditions of Hong Kong’s common law system. The Chinese Foreign Ministry came out with a statement on Wednesday saying they will take necessary countermeasures to combat foreign interference. These comments were made after the US and EU said they would respond to China’s dominance of Hong Kong’s civil liberties. EU Foreign Affairs Minister Josep Borrell said the EU is considering issuing a robust message to China over the Hong Kong issue.


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