· Japan’s yen approached a five-month high on Thursday after a lack of progress in U.S.-Mexico trade talks hurt risk sentiment and drove investors toward safe-haven currencies.
It rose as much as 0.3% to 108.07 yen per dollar, close to its strongest level since Jan. 10, after negotiations in Washington on Wednesday aimed at averting U.S. tariffs on Mexican goods showed little sign of progress.
· Investors were focused on the euro, which has strengthened recently on the back of dollar weakness caused by rising bets on a U.S. interest rate cut.
The European Central Bank meets on Thursday, with traders looking to see how concerned policymakers are about signs of a downturn in growth.
The euro was 0.05% higher at $1.1227 after retreating 0.3% on Wednesday. The single currency has brushed a 1-1/2-month high of $1.1307 this week.
The ECB will try at Thursday’s meeting to give the ailing euro zone a boost and may even set the stage for more action later this year as an escalating global trade war unravels the benefits of years of monetary stimulus. It will also give updated staff growth and inflation forecasts.
· “What matters during the ECB meeting today is whether the Council will stick to its view that the economy will recover in the second half of the year,” Antje Praefcke, an analyst at Commerzbank, wrote in a note to clients.
“Draghi would have to sound very concerned about the growth and inflation outlook to cause a reaction in the euro.”
ECB President Mario Draghi is expected to maintain guidance about the possibility of more stimulus.
· The dollar index against a basket of six major currencies stooped to a two-month low of 96.749 midweek as benchmark U.S. yields declined sharply this week to 21-month lows on investor risk aversion and heightened prospects of the Federal Reserve cutting interest rates.
· EUR/USD is consolidating losses above 1.1200. Markets await the ECB which is expected to announce a new funding scheme (TLTRO) and publish new forecasts. The USD is gaining amid intensifying trade tensions.
From a technical perspective, the pair's inability to sustained above 100-day SMA - coinciding with the top end of a five-month-old descending trend-channel, warrant some caution for bullish traders. Hence, it would be prudent to wait for a decisive break through the mentioned barrier, around the 1.1300 handle, before positioning for any further appreciating move towards 1.1365-70 intermediate hurdle en-route the 1.1400 round figure mark.
On the flip side, a follow-through weakness back below the 1.1210-1.1200 region (50-DMA) would validate the overnight rejection and turn the pair vulnerable to accelerate the slide towards 1.1130 horizontal support. A follow-through selling below the 1.1100 handle has the potential to continue dragging the pair further towards the descending trend-channel support, currently near the key 1.1000 psychological mark..
· The European Central Bank (ECB) announced its easy-money exit strategy one year ago. But twelve months on, the world couldn’t look more different.
The trade dispute between the U.S. and China risks derailing economic activity, the Federal Reserve will most likely cut rates this year instead of hiking them further, and inflation hasn’t picked up at all.
So what’s next for the euro zone’s central?
Its Governing Council meeting this week in Vilnius, Lithuania, might not be a game-changer that goes down in history books, but it will shed more light on the details of its new lending scheme for banks — which was brought in after it had to make a U-turn on policy earlier this year
One focus will be what the new cheap loan program for banks, the TLTROs (targeted longer-term refinancing operations), will look like. In April, President Mario Draghi said that the ECB will look at how monetary policy is working and how the economic outlook has shaped up when setting the terms for the loans. Essentially, these loans should make the euro zone’s banks lend more to the real economy. They have a negative deposit rate so they would pay lenders for taking the cash, meaning it’s a strong incentive for the banks to use them
Meanwhile, some more clarity on what the ECB expects in terms of inflation and its growth outlook will come in the form of an update of their staff projections.
“Core HICP (harmonized index of consumer prices) inflation forecasts look too optimistic,” said Mark Wall, the chief economist at Deutsche Bank, in a research note.
“We expect the 2019 and 2020 forecasts to be revised lower by at least 0.1 (percentage point),” he added.
And of course, there’s also the departure day for Draghi which may be discussed at Thursday’s press conference this week. Who will succeed the Italian economist is not clear at all. It’s expected that a summit in June will decide on all the high-level vacancies in Brussels. And at the central bank there are at two French names, François Villeroy de Galhau and Benoit Cœuré, two Fins, Erkki Liikanen and Olli Rehn and Germany’s Jens Weidmann who are in the running.
· Investors are getting too far ahead of themselves in expectations for the Federal Reserve to cut rates, according to a pair of top bankers at UBS and Goldman Sachs.
Hopes for cheaper borrowing costs have spiked on the back of recent comments by Federal Reserve Chairman Jerome Powell and other top officials at the U.S. central bank, sending U.S. stock markets soaring.
But Axel Weber, chairman of Swiss bank UBS, said Thursday that traders may be misreading the tone of such remarks.
“I think the market has overpriced the amount of rate cuts that the Fed is likely to do,” Weber said during a panel discussion at an Institute of International Finance meeting in Tokyo.
“If you listen to some of the key decision makers like Charlie Evans, if you listen to Jay Powell, there is no imminent rate cut, ” Weber said. “There is likelihood if further weakness in the data evolves over the second half of the year that they might consider corrective action.”
John Waldron, president and chief operating officer at Goldman Sachs, voiced similar concerns to CNBC’s Nancy Hungerford.
“The market is pricing in a fairly substantial set of moves by the Fed,” said Waldron, who was also attending the meeting. “I worry a little bit that the market is too optimistic about how much and how soon the Fed will move.”
Weber also said he doesn’t see the Fed taking any precautionary rate cuts “at this point.”
But Weber, who is also chairman of the IIF, said it is clear the Fed stands ready to respond if it deems such action necessary.
· President Donald Trump told reporters Thursday that tariffs on China could be raised by another $300 billion if necessary.
Trump said talks are ongoing with China on trade, adding that he thought that Beijing wanted to make a deal.
· U.S.-China tariffs, that have been both implemented and proposed, could cut global economic output by 0.5% in 2020, the International Monetary Fund (IMF) warned Wednesday.
Christine Lagarde, the IMF’s managing director, said in a briefing note for G-20 finance ministers and central bank governors that taxing all trade between the world’s two largest economies would cause some $455 billion in gross domestic product to evaporate. This would be a loss larger than South Africa’s economy, it said.
· The U.S. Department of Defense has held talks with Malawi’s Mkango Resources Ltd and other rare earth miners across the globe about their supplies of strategic minerals, part of a plan to find diversified reserves outside of China, a department official said on Wednesday.
“We are looking for any source of supply outside China. We want diversity. We don’t want a single-source producer,” Jason Nie, a material engineer with the Pentagon’s Defense Logistics Agency, said on the sidelines of the Argus U.S. Specialty Metals conference in Chicago.
The DLA, which buys, stores and ships much of the Pentagon’s supplies - ranging from minerals to airplane parts to zippers for uniforms - has also held talks with Burundi’s Rainbow Rare Earths Ltd about future supply, as well as offered to introduce the several U.S. rare earth projects under development with potential financiers, Nie said.
“We can make connections,” he said.
· China’s Foreign Ministry said on Thursday it is seriously concerned about U.S. arms sales to self-ruled Taiwan, after a source told Reuters that Washington was planning a $2 billion weapons sale to the island China claims as its own.
China urges the United States to stop arms sales to Taiwan to avoid harming bilateral relations, ministry spokesman Geng Shuang told a daily news briefing in Beijing.
· The Reserve Bank of India cut its policy interest rate by 25 basis points in a widely expected move on Thursday, while also changing its monetary policy stance to “accommodative” after the economy grew at its slowest in over four years.
The six-member monetary policy committee (MPC) cut the repo rate to 5.75 percent as predicted by 44 of 66 analysts polled by Reuters last week. The reverse repo rate was reduced to 5.50 percent.
All six of the MPC members voted for a 25 basis points cut, and for the policy stance to be changed to “accommodative” from “neutral”.
· Oil is in the crosshairs as the prospect of confrontation brews between the U.S. and Iran. At least, that’s how Iranian officials would have it.
A top military aide to Iran’s supreme leader Ayatollah Ali Khamenei, Yahya Rahim Safavi, warned over the weekend that “The first bullet fired in the Persian Gulf will push oil prices above $100.” He added, “This would be unbearable to America, Europe and the U.S. allies like Japan and South Korea.”
· Oil prices steadied on Thursday after falling to near 5-month lows in the previous session, but sentiment remained weak as markets are under pressure from rising U.S. supply and a stalling economy.
Front-month Brent crude futures were at $60.78 at 0246 GMT. That was 15 cents, or 0.3%, above last session’s close.
U.S. West Texas Intermediate (WTI) crude futures were at $51.84 per barrel, 16 cents, or 0.3%, above their last settlement.
Brent and WTI on Wednesday hit their lowest levels since mid-January at $59.45 and $50.60 per barrel, respectively, amid a surge in U.S. crude inventories and record production, and as a global economic slowdown was starting to hit energy demand.
Reference: Reuters, CNBC, FX Street
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