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108.635
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0.96166
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1.35015
EUR / JPY
121.727
AUD / USD
0.69375

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China Abandons GDP Growth, Sounds Gloomy on Outlook. Will the Bearish Impulse be Sustainable?
Chinese government made “injected” some reality into stock markets today, saying that they don’t’ promise any concrete GDP numbers for 2020, mentioning also the significant uncertainty because of which the impact of a number of factors is difficult to predict. Among those factors is probably a second wave of Covid-19 outbreak. One important sign of this was the fact that recently about 100 million Chinese people have been put quarantined in China. Such wave-like virus spread dynamics translates into a bumpy path for economic growth and activity in the near future, which can’t be averted by liquidity injections and “healthy” stock market valuations.

The logical chain can be continued further and, for example, we can conclude that the demand for resources, including energy, will suffer. It was impossible to pull the spring in oil endlessly, in fact, the factor of the pessimistic Chinese leadership, which abandoned the GDP target, was the reason (convenient premise?) for retracement that we see on Thursday. The commodity market as a whole is also quite frustrated with copper futures dipping by more than 2%. The outlook from the government of the second largest economy in the world, which, to put it mildly, calls for preparing for difficulties, in my opinion, will help the bearish impulse to gain some traction, in particular in emerging markets and commodity currencies.

The latest trade data on Asian economies again lowered the bar for the speed of recovery. The preliminary report on South Korea’s foreign trade unexpectedly indicated a strong decline in overseas shipments in May (-20.3% YoY). Sales of cars and spare parts abroad (in particular, to the main markets – to Europe and the USA) remain depressed, and the export of semiconductors has grown. This is baffling update since it shows that there is a permanent blow to consumption of durable goods and lifting lockdowns won’t fix it quickly. The export of Japan and South Korea to China has grown if we consider the monthly dynamics which serves as another evidence that lifting lockdowns won’t lead to V-shape dynamics in activity.

Recent market discussions about the negative rate of the Bank of England and QE are developing now into concrete expectations of another rate cut. Recall that when we talk about negative interest rate, we are not talking about a market rate (since holding cash yields 0% return and it is always better than negative return if we don’t take into account such complications as costs of storing cash), but about the Central Bank’s rate on bank reserves. The Bank of England wants to take such a radical step, since the last rate cut from 0.75% to 0.1% appears to not have reached the end loan consumers, particularly mortgage borrowers:

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Actually, this dynamics speaks in favor of the need to lower the rate further. The head of the Central Bank, Bailey, quickly moved from the camp of opponents to the camp of supporters of negative rates, said yesterday that such an opportunity was being actively discussed. Against this background, GBP is expected to decline further, the immediate goal is to retest the level of 1.20. I continue to hold bearish position in the pair expecting it to retest 1.20 level:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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April ECB Minutes Show the Central Bank Doesn’t Know What to Expect
The minutes of April ECB meeting, released on May 22, revealed that the Central bank is eager to deliver more. “Minutes” are worthless they say, because it’s priced in… not the case this time.

Two key things from the report: the ECB is ready to ease credit conditions more and the fact that PEPP remains key policy tool. By the way, PEPP is an emergency “pandemic” program of purchases of private and public sector securities in the amount of 750 billion euros and which will be in effect until the end of 2020. Programs of this kind are usually done in crisis. Their key feature is lowered bar for quality of purchased debt. The key purpose is to directly buy debt of struggling firms and local governments, which are avoided by other creditors because of concerns about creditworthiness. The launch of the program basically leads to the appearance of indiscriminate buyer on the market which hampers market price discovery, leads to excessive risk-taking, etc., but these are considered to be manageable “side effects”. Another issue is that the program has a limit and it will end soon. With current pace of buying the ECB will reach the current limit in September-October. But the minutes, as we see, hinted that extension of the PEPP limit may be on the agenda of one of the next meetings. Given the ECB’s bias to act proactively, the expansion of PEPP may be discussed as early as June.

It is also curious that the ECB for the first time described medium-term uncertainty as radical uncertainty – i.e. risks which can’t be quantified. The Central Bank seeks a solution, experimenting more with preventive policy decisions which tend to cause positive shocks in market sentiments.

The USD index rose at the start of Monday although losing punch later, but it wasn’t about stronger USD: the cause of gains was weaker euro, which has the biggest weight in the index.

IFO index update showed expectations rose higher than expected, but assessment of current situation was worse than expected. A number of survey indicators for May, which we analyzed earlier, where respondents were asked to assess future expectations, turned out to be better than forecasts. This also indicates that a lot of expectations are priced in equities.

On balance, the balance for euro shifts towards more declines with possible test of the lower bound of two-month range:

Image-4.png


In Asian markets, attention has been drawn to a rise in the USDCNY reference rate to its highest level since the 2008 crisis. Pressure on the yuan is rising due to capital outflows, and the central bank of China has “officially recognized” this, weakening CNY official rate. Investors are getting rid of Chinese assets because of fear that a new conflict between China and the United States may escalate into a full-fledged financial war. The dynamics of USDCNY over the past two years shows that the mainland yuan depreciated against the dollar whenever Trump threatened tariffs and strengthened anti-Chinese rhetoric. The last episode of the weakening of renminbi probably reflects an anxiety of the same nature:

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Accordingly, the demand for risk can get hit from this front as well, which is undoubtedly a positive factor for strengthening the dollar.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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COT Data: Buying Pressure Decreases in Crude Oil, More Sellers Resign
Market players are now sitting tight in crude oil as the price continues to float in the narrow range with key support to sentiments offered by voluntary/involuntary supply cuts. Upturn in commodity markets along with weaker dollar are also reflected in strong performance of EM and commodity currencies. As the bull trend in the oil market ripens, speculators are less willing to support it, shows COT data from the CFTC (weekly data on open positions of speculators and hedgers in the US). Growth of long positions slowed down from the end of April, and in the week of May 12 – May 19, the number even slightly decreased:

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The price gain in that week was achieved mainly by continued decline in short positions:

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The onslaught of buyers declined due to the fact that fundamental picture of the recovery in demand remains controversial, since the restart of economies follows a conservative scenario, while there is a risk of repeated lockdowns/extension in some countries. However, Russian Ministry of Energy expects that oversupply will disappear in June/July due to faster demand recovery. Drilling activity in the US continues to decline despite favorable price dynamics. The number of operating rigs decreased by 21 to 237. This is 65% less than in mid-March.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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BoJ Yield Curve Control and new Supply of Government Debt. What to Expect from the Yen?
After DXY support at 99 points were damaged on Tuesday due to powerful risk-on move, the currency continues to cede ground on Wednesday. Asian equities posted mixed performance; European stock indices apparently enjoy another day of gains. Gold tries to defend hard support at $1,700 per troy ounce, but hunt for yield seems to be gaining upper hand. The collapse of USD yesterday basically confirmed that the main trading theme in FX space remains “USD vs. risk-on” and all country-specific events affecting national currencies may not be reflected in USD pairs but rather finds its way in crosses. The tug of war between risk-taking and risk aversion camps, where USD seemed to be one of the biggest beneficiaries seems to stay in the market for some time, while volatility, in the historical perspective, remains elevated.

The Japanese government will spend an additional $1.1 trillion to protect the economy, showed government’s budget draft released on Wednesday. Together with the fiscal package of $1 trillion announced just a month ago, the total government spending related to the fight against the virus and recession caused by it will amount to a whopping $2.2 trillion, or 40% of GDP. Only the United States spent more – $2.3 trillion, but adjusting the spending for GDP size, there is, of course, not contest for Japan.

The government’s spending plan for 2020 imply an additional issue of 200 trillion yen of fresh debt. To avoid a jump in borrowing costs, the supply will have to be soaked up by some robust demand. Japanese bond market won’t be probably surprised or spooked by massive debt supply, since there is “omnipotent” Bank of Japan with its yield curve control program. By the way the YCC is probably the most radical degree of bond markets intervention in Central Banks’ practice. The essence of this program is that the Central Bank announces that it is ready to buy an unlimited amount of bonds of a certain maturity at some fixed price. In other words, it guarantees some price. Obviously, this sets a lower threshold for the bond price and also stabilizes it. The main difference from QE program is targeting the bond price, not monthly amount of purchases as in case of QE.

If bond price cannot go below some level it means that the yield to maturity cannot generally rise above some level (hence the name “yield control”). To see how this works in practice, let’s try to see some difference between behavior of prices of 10-year government bonds of the US and Japan according to our reasoning:

Image-5-1.png


And indeed, we see that in the US, where the Fed has not yet introduced this program volatility of the price is much higher comparing to the price of JGB. We can also see the price floor around 100 pts for JGB.

Bank of Japan officially announced in 2016 that it would target the yield on 10-year government bonds in a narrow range near 0%.

Obviously, in the context of the government’s plans to massively expand the debt, the operation of the YCC essentially means a new large-scale QE. I repeat once again that this may not be reflected by USDJPY, but in cross-rates, these expectations, in my opinion, may determine the yen’s medium-term weakness.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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AUDCAD: Can’t Divide the key Level
The trade war draws in new parties while the trend toward manufacturing independence gradually gains traction. This time, Australian exports of coal to China have caught market attention. Soured relations between the two countries can lead to China to putting more emphasis on its domestic coal production and create more barriers to imports, thereby reducing the size of key market for Australian coal.

Earlier, China imposed duties on beef and barley from Australia because the latter called for an independent investigation of origins of the coronavirus. Now the market is digesting the rumors that China Development and Reform Commission (the main planning authority) has ordered state-owned companies in the utilities sector to halt purchases of thermal coal from Australia. It is critical to understand now how much Australia’s coal exports will suffer in quantitative terms and how long it will continue if rumors turn out to be more than just rumors.

Coal exports for heating from Australia plummeted by 41% in the week ending May 24 compared to last week, FT reports referring to data from the transport broker Thurlestone Shipping.

23% of Australia’s coal exports accounted for China (data as of March 2020):

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Rumors of a trade war with China pose a risk of weakening AUD. If China really restricts coal imports from Australia, this gives reason to expect that iron ore, the largest commodity export item in Australia, could also fall under the threat of losing key market. The headwinds for the export of iron ore will create a more tangible blow to the Australian economy. Now the risk of such a scenario gives rise to opportunity for AUD to lag behind its “commodity peers”, for example, CAD.

Let’s examine possible technical setup for AUDCAD:

us500-h1-2-1.png


Commentary:

Considering the technical picture of AUDCAD on the daily timeframe, we can see that the pair has been in a state of decline since the end of November 2016. Despite some subjectivity, the indicated trend line touches four price extremes formed in the downtrend. We can also see that the pair touched several times the level of 0.91500, which has established itself as a solid support level. The drop below this level in September last year was held with a relatively small objection from buyers, after which the level was re-affirmed as resistance. During the upward correction from the beginning of March, the pair returned to this level. Given the fundamental expectations for AUD, the trading idea may consist in a short position on the pair with a short stop loss in the area of intersection with the trend line and wide profit target which can be corrected later.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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“Absurd” Employment Situation in the US and Possible Consumption Shock in August
The rally in equities was brought to a halt with mild retracement in the US stocks observed on Thursday. Asian and Europe equities followed suit today, erasing from 0.1 to 1.5%. The driver of declines is largely a precautionary sell-off as Trump is going to lay out a plan today on how he is going to increase pressure on China.

Earlier, Mike Pompeo said that the US no longer considers Hong Kong an autonomous region, which was the first significant reaction of the US government to the decision of China to annul the superiority of local Hong Kong law (regarding security matters) over the national one. Pompeo’s comment seems to look like a standard attempt by an American politician to label an unwanted step by the rival country but given that there is 1992 Hong Kong policy act (which is based on Hong Kong’s autonomy from China), Pompeo’s statement puts under question the future of this law. And this is already far-reaching economic and political consequences. Let’s see what Trump will say today.

JP Morgan Bank analyst Marko Kolanovich, who in early March recommended investors to buy the dip in stocks and then consistently maintained his bullish stance for almost two months, said this week that increased political risks justify limiting exposure to US equities. In other words, the analyst doubts about further stock market rally due to tensions of the US with China. A month ago, Kolanovich forecasted that in the first quarter of 2021, the S&P 500 could renew historic highs.

Initial claims for unemployment benefits rose by 2.12 million, which is slightly higher than the forecast (2.1 million). Since the beginning of sanitary restrictions, the number of applications has reached 41 million. At the same time, continuing claims showed a larger than expected reduction – from 24.9 million to 21.05 million, with a forecast of 25.7 million.

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Undoubtedly, some of the workers returned to work, but conclusions about a strong trend in the recovery of employment may be premature – some of the unemployed also receive benefits under the so-called pandemic program, where the number of continuing claims is more than 30 million.

In the analysis of all these figures for employment, unemployment claims, it is important to keep in mind one important point. In the United States, there is a federal program for extra unemployment benefits in the amount of $600 (until the end of July). This means that some unemployed Americans now receive almost $ 1,000 a week. For some industries, in fact, an absurd situation arises where lounging is more profitable than working. A study by the University of Chicago showed that 68% of those who receive benefits now have more income than when they worked, and for 20% of those who lose their job, the benefits will be twice as much as earnings. In other words, workers now have little incentive to look for job, and this can continue until the end of July. The most interesting thing is when the program comes to an end – income will fall sharply, there may be fewer vacancies, and therefore a consumption shock may occur.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 70% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 
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