Risk sentiment pendulum swings on Aussie/China headlines
Erik Bregar of Exchange Bank of Canada - InsideFutures.com - Tue May 12, 10:23AM CDT

ANALYSIS

USDCAD

Its been a volatile overnight session for the broader USD; with the risk sentiment pendulum swinging from negative in Asia to positive in Europe as traders digested conflicting Aussie/China headlines. The Asian session started with President Trump saying he was not interested in reopening the Phase One US/China trade deal after some Chinese government advisors called for scrapping the trade pact and negotiating a new one that tilts the scales in Beijings favor. Traders then quickly jumped on the news that China had banned imports from four Australian beefproducers today, which account for 35% of total beef exports to China. This followed their threat of an 80% tariff on Australian barley imports yesterday and stoked even more fears that China is finally starting to retaliate against provocations from its trading partners. The resulting 50pt fall in AUDUSD led the USD higher across the board during the 9pmET hour.

The Australian trade minister, Simon Birmingham, then went on damage control at the start of European trading saying that he believed their meat exporters were having minor technical issues with China and that the suspension of exports was not related to Australias desire for a formal coronavirus inquiry. A spokesperson from Chinas foreign ministry then confirmed the suspension was unrelated to the bilateral dispute over COVID-19, citing instead the continuous inspection and quarantine violations from Australian companies when it came to their beef imports, and the need to ensure the safety and health of Chinese consumers. The spokesperson also reiterated that the Phase One trade deal is beneficial for China, the US and the rest of the world. Separate headlines also crossed during the European morning saying that China had raised its soybean and corn import forecasts for the current marketing year, citing the impact of implementing the Phase One trade deal with the US, and that China had announced a list of 79 US products upon which tariffs would be waivedand before we knew it, the risk-off moves we saw in Asia had completely reversed, and then some. The AUDUSD market has now charged back above the 0.6480 and 0.6510 levels that it lost yesterday, and this move has dragged the broader USD lower once again.

The US just reported its CPI numbers for the month of April and the headline unexcitedly matched expectations of -0.8% MoM. Five Federal Reserve members will be speaking today over the course of the trading session (Bullard and Kashkari during the 9amET hour, Quarles and Harker during the 10amET hour, and Mester at 5pmET), which could offer up some more interesting headlines. The Federal Reserve will start purchasing corporate bond ETFs today, as part of its new Secondary Market Corporate Credit Facility, which some tradersciting this as another reason for this mornings improved risk tone. Mark your calendars for 9amET tomorrow, when Fed chairman Powell is expected to speak about the current economic issues and formally denounce the concept of a negative Fed funds rate.

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USDCAD HOURLY

JUNE CRUDE OIL DAILY

JUNE CRUDE OIL DAILY


EURUSD

Euro/dollar is roaring back with the Aussie this morning as well, as broad risk sentiment is on the mend. We suspect todays 1blnEUR option expiry in the 1.0870s could be attracting spot prices as well. Expect more of this choppy price action to ensue this week, as the DTCC option boards are littered with more expiries; most notably below 1.0800 on Thursday.


EURUSD DAILY

EURUSD DAILY

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EURUSD HOURLY

SPOT GOLD DAILY

SPOT GOLD DAILY


GBPUSD

Sterling traders are trying to bid up GBPUSD with the improved risk tone this morning, but we feel that the markets negative chart structure is holding it back (bearish head and shoulders pattern on the daily). There has also been steady accumulation in EURGBP over thelast week, and we think these buyers will feel even more emboldened should the cross produce a strong NY close above the 0.8780s.

The Bank of Englands Ben Broadbent reiterated the MPCs commitment to do whats necessary when he spoke this morning and, while he said that more quantitative easing could possibly be needed, none of this should really be a surprise to markets given the BOEs update last week that the current level of QE purchases will run its course by July. From a fundamental perspective, we think traders continue to focus on the UKs lockdown-easing plans and the state of EU/UK Brexit transition talks; neither of which appearto be going well.

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GBPUSD DAILY

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GBPUSD HOURLY

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EURGBP DAILY

AUDUSD

The Australian dollar has been the focal point for FX traders over the last 36hrs as China takes aim at Australias agricultural export sector. Some traders are casting doubts over Chinas denial that the proposed duties/bans serve as retaliation for Australias push to investigate Chinas culpability with the coronavirus outbreak, but we would caution and remind these traders that the trading algorithms (which are hugely prevalent nowadays) are limited to absorbing the headlines at face value. AUDUSD now trades at trend-line resistance (turned support) in the 0.6510s.

We think tomorrow and Thursdays large option expiries around the 0.6500 strike could ultimately keep the market close to current levels, but were also mindful of some even larger expiries around/below the 0.6400 strike for Thursday, which could make things very interesting if tomorrow nights Australian Employment Report shocks to the downside.


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AUDUSD HOURLY

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USDJPY

Dollar/yen was the darling in FX markets yesterday as it ripped back above the 107.00 figure. Nobody could put a finger on the exact fundamental narratives driving the move in our opinion, buts that ok. Sometimes the biggest moves in FX markets are technical/flow driven and its the confusing/collective thirst for a narrative which can make the move even stronger as losing traders liquidate. Reuters reported a US bank buying USDJPY in size yesterday and they also reported post-Golden Week Japanese importer demand. We look at yesterdays move, on a more simplistic basis, as a clean technical break above the 106.50-60 level which capped prices on Fridaycombined with GBP and AUD-led dollar demand.

Its interesting to see the market switch back to a positive correlation with risk sentiment now though, with a more tepid NY tone now pressuring USDJPY and lifting the USD elsewhere. The dollar/yens correlation with risk sentiment continues to flip flop back and forth unpredictably though, which makes for throwing away traditional correlation models in our opinion. Pay attention to todays litany of Fed-speak as it could very well be the driver of trader pre-positioning heading into Powells speech tomorrow.


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USDJPY DAILY

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USDJPY HOURLY

US 10YR YIELD DAILY

US 10YR YIELD DAILY

Charts: Reuters Eikon

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