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US-China tension dominate traders’ minds

USD

The USD traded lower overnight against the EUR and CAD while gaining against the GBP and trading relatively unchanged against the JPY. Equity market euphoria continued yesterday as the DOW again finished over 550 points higher. Earlier in overnight trading, DOW Futures were indicating an opening around 100 points higher when the market opens later today. Overnight, China approved the controversial national security bill for Hong Kong. China’s National People’s Congress approved the proposal to suppress subversion, secession, terrorism, and any acts that may threaten national security in Hong Kong. US Secretary of State Mike Pompeo indicated that the US will no longer consider Hong Kong to have autonomy under Chinese rule and that the Trump administration will look to end special trade relations with Hong Kong. The DOW may also be affected by the weekly release of jobless claims as another 2 million Americans have filed for unemployment benefits. Last week the number was 2.44 million, so there is an improvement but this has brought the number of Americans unemployed passed the 40 million mark. As states are reopening, people are going back to work so an improving number is not surprising. US Treasury yields are higher this morning with the 10-year note trading at 0.6966% and the 30-year bond higher at 1.4672%. US GDP growth for the second quarter is also due out before the opening stock bell and the forecast is showing a contraction of 4.8%, the largest decline since the financial crisis. Traders will have an hour to digest all this news and any other possible China-related announcements from US policymakers. Concerns over US-China relations could see a safe-haven move into USD as relations are expected to become more strained.

EUR

EUR/USD traded close to 8-week highs overnight at investors are looking at the continent reopening and the announcement of the European Commission’s recovery fund. Technically the EUR is showing upside momentum on the four-hour charts and the Relative Strength Index (RSI) remains below 70, indicating conditions are not yet at the “overbought” stage. The new EC recovery plan seems to go further than the original Franco-German plan, adding further grants worth EUR500 billion, which would be funded by mutual debt. This will help the economies of Spain and Italy, those hardest hit by the pandemic. The EUR is now trading at levels not seen since early April. This is not yet a done deal, but it does seem the “Frugal Four” are warming up to the deal. Negative comments, however, could hurt the upward movement of the EUR, and if they come out with support for the new plan the EUR should see some further upward movement. Adding to the “EUR euphoria”, virus cases have continued to fall in Europe, but there are occasional flare-ups, but these remain isolated, and as Europe reopens the trend for EUR remains upbeat. 

GBP

GBP/USD is lower this morning as Great Britain refuses to extend the Brexit transition period and comments again by the Bank of England regarding negative interest rates are weighing on sterling. Technically, the pound has fallen below the 100-day moving average on the four-hour chart, as well as the 200-day chart. Adding to the pound’s woes were Conservative Party members urging PM Johnson to remove advisor Dominic Cummings. However, the PM has asked citizens to focus on the Coronavirus, not Cummings. It seems the Brexit saga is never-ending as Britain has refused to extend the transition period, making it clear they will trade under World Trade Organization terms beginning in January. Adding to the pound’s woes, Andrew Bailey, the Governor of the Bank of England, said that the door is open to setting negative interest rates and while the bank does not seem to be there yet, it is getting closer. All in all, sterling should remain pressured today.

JPY

USD/JPY is trading in a quiet overnight range as tensions between the US and China spur demand for safe-haven assets, as the US government announced it’s studying sanctions on China after the country imposed security laws on Hong Kong. The Japanese government released its monthly economic assessment for May and stated the economy is in a severe situation. According to the report, exports and private consumption were decreasing. With no economic releases coming from Japan, traders will be focusing on US data releases later this morning, Technically, USD/JPY is trading below yesterday’s highs and below the 50, 100, and 200 moving averages, so downward pressure should continue. As long as their remains concern over the US reaction to China’s move regarding Hong Kong, safe-haven buying should keep pressure on the USD.

CAD

USD/CAD is trading quietly overnight as oil prices fall off a bit. Brent crude futures fell $1.10 to $33.64 per barrel and US West Texas Intermediate was down $1.44 to $31.37 per barrel. This was the second-day oil prices moved lower as US industry data showed an increase in US oil stockpiles. Positive news regarding a potential virus vaccine saw the Canadian Dollar move a bit higher, but there has been no follow through to this point. Technically, the loonie is in the middle of its trading ranges as it is trading below the 50-day moving average and above the 100 and 200-day moving averages. Expect this range trade to continue. Any positive movement in oil trading today would have a positive effect on the Canadian Dollar.

CNY

US-China relations may face new problems and new challenges according to comments made by Chinese Premier Li Keqiang. He said that further disputes will harm both sides as well as the global economy and that the US and China stand to gain from cooperation and lose from confrontation. He also said both sides should try to work together to expand common interests. These remarks came after the US reacts to the new laws passed by China regarding Hong Kong which are expected to take effect in September.

Quick Insights

USD: USD lower and equities higher.

USD: USD lower and equities higher.

EUR: EUR higher as EC proposes recovery plan.

EUR: EUR higher as EC proposes recovery plan.

GBP: GBP under pressure as Brexit negotiations and negative interest rate talks continue.

GBP: GBP under pressure as Brexit negotiations and negative interest rate talks continue.

JPY: Safe-haven trading in JPY continues.

JPY: Safe-haven trading in JPY continues.

CAD: New laws on Hong Kong expected to take effect in September.

CAD: New laws on Hong Kong expected to take effect in September.

CNY: New laws in Hong Kong expected to take effect in September.

CNY: New laws in Hong Kong expected to take effect in September.

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