· The British pound fell on Tuesday after reports UK Prime Minister Boris Johnson was seeking a hard line on Britain’s transition period after Brexit, while the Aussie dollar dropped on a downbeat tone from the nation’s central bank.
Sterling dropped as much as 0.7% to $1.3236, as its Friday’s 1-1/2-year peak of $1.3516 looked increasingly like a near-term peak following the massive relief rally after last week’s UK election.
“Common sense suggests that crafting a trade deal would take at least more than a year, so markets had assumed that the transition period will be extended,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
“It seems like the big majority Johnson won is enabling him to take a hard line approach, which the market doesn’t like so much... Considering the UK economy looks set to deteriorate as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over,” he added.
The Australian dollar lost 0.2% to $0.6868 after the Reserve Bank of Australia opened the door to another cut in interest rates as early as February, should household incomes stay depressed or the labor market takes a turn for the worse.
Against the yen, the dollar traded at 109.56 yen, up 0.05% from late U.S. levels, having gained 0.15% on Monday to edge near six-month high of 109.73 hit on Dec. 2.
The euro stood at $1.1147, maintaining its uptrend from its seven-week low of $1.1098 touched on Nov. 29.
· Axel Rudolph, analyst at Commerzbank, suggests that EUR/USD once more flirts with the 200 day moving average at 1.1152, having last week briefly shot up to the 1.1200 mark.
“Further range trading around the 200 day moving average is on the cards today. Above 1.1200 lie the 55 week moving average at 1.1208 and the August peak at 1.1249. Further up meanders the 200 week moving average at 1.1358 which remains in focus for the weeks to come.”
“It represents a critical break point on the topside from a medium term perspective. Support below the 1.1116 December 4 high and the 1.1097 November 21 high is seen at the December 6 low at 1.1040.”
“Failure at 1.0981 would target the 78.6% Fibonacci retracement at 1.0943. This is seen as the last defence for the 1.0879 October low. If revisited, we would look for signs of reversal from there.”
· USD/JPY looks for direction around 109.60 amid doubts over US-China trade/Brexit
USD/JPY trades around 109.60 at Tuesday’s Tokyo opening. That said, the pair recently struggles to extend the previous recovery as markets doubt the latest optimism surrounding the phase-one, Brexit concerns.
The USD/JPY pair is technically bullish according to the 4-hour chart, as it continues developing above all of its moving averages, with the 20 SMA, extending its advance above the larger ones. The Momentum indicator has resumed its advance, despite being in overbought territory, while the RSI continues hovering directionless near overbought levels. The pair needs to accelerate through 109.72, December high, to be able to extend its rally to 110.00. Below 109.20, on the other hand, the risk would turn to the downside, with 108.90 as a possible target and a line in the sand.
Support levels: 109.20 108.90 108.60
Resistance levels: 109.75 110.00 110.40
· Just hours after the U.S. and China agreed to a phase one trade deal, CNBC reported that U.S. trade officials are considering hitting a raft of EU goods—like whisky, Cognac, cheeses and more—with 100% tariffs.
The Office of the United States Trade Representative (USTR) published on Thursday a list of hundreds of goods that, in addition to the liquor and cheeses, includes wine and different types of meat and seafood as well as nonmilitary helicopters.
According to CNBC, the new tariffs are being weighed in response to fallout over Airbus, which the U.S. has long argued receives subsidies that hurts American aircraft maker Boeing, a competitor.
In October the U.S. imposed 10% tariffs on large civil aircraft and 25% on agricultural goods from Europe, and Thursday’s proposed tariffs would increase the previous rates to 100% and add new ones.
The USTR told CNBC that because the EU has not reined in the Airbus subsidies, “the United States is initiating a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs.”
Key background: President Trump threatened on December 4 to slap France with 100% tariffs, a retaliatory move over the European country’s 3% digital tax. The tax, aimed at big, mostly American tech companies like Amazon and Facebook, is seen by the USTR as discriminatory. And although a phase one trade deal is in place with China (which Trump trumpeted as “amazing”) a few things remain uncertain. Namely, it’s unclear if China will actually purchase the $50 billion of U.S. agricultural goods Trump requested, and one economist said the deal is not as big a win as both sides are claiming.
· Boris Johnson will attempt to mark his election promise to “get Brexit done” by writing into law that the UK will leave the EU in 2020 and will not extend the transition period.
As MPs begin to be sworn in at Westminster on Tuesday, the prime minister’s team is working on amending the withdrawal agreement bill so that the transition, also known as the implementation period, must end on 31 December 2020 and there will be no request to the EU for a further extension.
· Japanese Economy Minister Yasutoshi Nishimura said on Tuesday he hoped the nation’s exports and factory output would improve following an initial trade agreement between the United States and China.
· Chinese corporate debt is the “biggest threat” to the global economy, warned a Moody’s Analytics economist, who described such risks as a “very significant fault line.”
That followed similar comments by Fitch Ratings last week, which said that private companies in China have defaulted on their debts at a record pace this year.
While corporate debt is a “fault line in the financial system and the broader economy,” Moody’s Chief Economist Mark Zandi flagged indebted Chinese companies as the larger risk.
“I would point to Chinese corporate debt as the biggest threat,” he said, adding that it’s growing very rapidly in China.
Zandi explained that many companies are struggling to deal with a slowdown in growth stemming from the trade war and other factors.
“In the United States, it’s similar kind of picture — not to the same degree — but we have seen very significant increase in so-called leveraged lending, as in lending to highly indebted companies, and they are vulnerable if the economy were to slow,” Zandi said.
The government is to add a new clause to the Brexit bill to make it illegal for Parliament to extend the process beyond the end of next year.
The post-Brexit transition period - due to conclude in December 2020 - can currently be extended by mutual agreement for up to two years.
But an amended Withdrawal Agreement Bill the Commons is set to vote on this week would rule out any extension.
Critics say this raises the chance of leaving the EU without a trade deal.
· Goldman Sachs raised its oil price forecasts for 2020, citing tighter-than-expected inventories after the Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to deepen oil output cuts through the first quarter of next year.
“We are increasing our forecast for backwardation in 2020 although our long-term marginal cost forecast remains unchanged,” Goldman analysts wrote in a note dated Dec. 6.
The bank revised its Brent spot price forecast to $63 per barrel for 2020, up from a previous estimate of $60, while it also increased West Texas Intermediate (WTI) spot price outlook to $58.5 per barrel from $55.5.
· Oil prices trickled a fraction lower on Tuesday but remained near a three-month high as investors kept the faith with hopes that a fully fledged U.S.-China trade deal is in the pipeline, set to stoke oil demand in the world’s biggest economies.
Brent crude oil futures had slipped by two cents to $65.32 a barrel by 0422 GMT, while West Texas Intermediate crude was down four cents to $60.17 a barrel.
Reference: Reuters, CNBC,FXStreet
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