• USD/JPY drops from Friday’s close amid fresh risk aversion.
  • US Secretary of State Pompeo said the threats from the Chinese Community Party’s military advances are real.
  • US President Trump avoided major confrontations with China during Friday’s speech.
  • Jibun Bank Manufacturing PMI will decorate the calendar, US-China story could keep the traders busy.

USD/JPY declines to 107.72 amid the early Monday morning in Asia. The yen pair seems to portray the market’s fear of escalating tension between the US and China despite the former’s President Donald Trump stepped back from any sanctions on the later during the recent speech.

China’s SCMP cites fears of worsening American-Sino tensions…

Despite US President Trump’s diplomatic performance on Friday, the South China Morning Post (SCMP) relies on anonymous government adviser comments to say that Chinese groups calling for more ‘fighting spirit’ are getting the upper hand on those who favor calm and cooperation.

On the other hand, US Secretary of State Mike Pompeo also flashed red signals for the Asian major by saying that the Chinese Communist Party’s military advances are real. The US diplomat also said, in his latest interview by Fox, that President Trump will always keep us in a position where we can protect the American people.

The US leader, Donald Trump, refrained from any direct sanctions on China during his press conference on Friday. However, the Republican leader did show his dislike for the situation in Hong Kong due to the Asian major’s will to grab the power. This pushed the US to shun trade preferences given to Hong Kong, details of which are unclear.

Amid all these catalysts, Wall Street closed mixed on Friday while the US 10-year Treasury yields dropped over five basis points to 0.65%.

Traders may now pay close attention to the US-China headlines for near-term direction. On the economic front, Japan’s first revision to Jibun Bank Manufacturing PMI, expected 38.4, could offer immediate direction ahead of the US ISM and Markit Manufacturing PMI.

Technical analysis

A downward sloping trend line from May 19, currently near 107.90 offers immediate resistance to the pair ahead of multiple highs marked since April 16 around 108.10. On the downside, 107.40/35, comprising May 16 high and May 27 low seems to challenge short-term bears.

 

The war of words has already started in the opening of the FX markets this week. US Secretary of State Pompeo has said that the Chinese Communist Party’s military advances are real. 

Key quotes

Our department of defense is doing everything it can to make sure it understands this threat.

President Trump will always keep us in a position where we can protect the American people.

Following last Friday’s heated delivery from US President Donald Trump in his China news conference, US Pres. Trump: Will take steps to sanction Hong Kong officials involved in eroding of autonomy, markets are on standby for an official response from China. The South China Morning Post explained that Chinese groups are calling for more ‘fighting spirit’ and are getting the upper hand on those who favour calm and cooperation, a government adviser says. “From Hong Kong to Covid-19, trade to the South China Sea, Beijing and Washington are clashing on a growing number of fronts and in an increasingly aggressive way.”

 

Chinese leader Xi Jinping has told the military, the People’s Liberation Army, to prepare for war! This comes as a growing border dispute between India and China, and threats of invasion of Taiwan threaten the global order and peace as well as heightened tensions with the US. 

Market implications

  • Chart of the Day: AUD/USD is at make-or-break resistance, 0.6400 or 0.6820

  • AUD/USD stays modestly changed from Friday’s close.
  • US President Trump refrained from any sanctions on China, for now, announced punitive measures for Hong Kong officials.
  • China’s official NBS Manufacturing PMI stays in expansion territory below 50.8 prior.
  • Activity numbers from China, the US will be important whereas political/trade headlines could keep the driver’s seat.

AUD/USD seesaws around 0.6660 at the start of Monday’s Asian session. In doing so, the Aussie pair seems to pay a little heed to the weekend developments while beginning the June month mostly only the same front where it ended the May.

China’s NBS Manufacturing PMI softened, Caixin Manufacturing PMI awaited…

In its May monthly activity data release, published Sunday, China’s NBS cited weakness in the Manufacturing front while portraying upbeat scenario for the Non-Manufacturing gauge. The headline NBS Manufacturing PMI weakened to 50.6 from 50.8 prior and 51.00 expected whereas the services indicator rose to 53.6 from 53.2.

Traders now await private manufacturing activity data, Caixin Manufacturing PMI, up for publishing at 01:45 GMT, to confirm the official readings. The forecast suggests that the Caixin Manufacturing PMI might improve from 49.4 previous readouts but remain in the contraction region to 49.6 in May.

Trump steps back reprimanding China…

During his much-awaited China press conference, US President Donald Trump refrained from announcing any sanctions on the Asian major, which the markets widely anticipated. Rather, the Republican leader criticized the dragon nation’s approach and shunned trade help given to Hong Kong, the details of which were unclear.

While the move disappointed markets in the initial minutes, it did keep the hope of peace between the US and China in the future. Even so, Wall Street closed with mixed performance whereas the US 10-year Treasury yields dropped 5.2 basis points (bps) to 0.653% by the end of Friday.

During the weekend, US President Trump said to postpone the G7 meeting until September and added Australia, Russia, South Korea and India to the list of nations to garner support versus the dragon nation. On the other hand, South China Morning Post (SCMP) came out with the news suggesting, “Moderates who favor dialogue and cooperation as a way to resolve China’s disputes with the United States are losing ground to hardline groups bent on taking the fight to Washington, according to political insiders and observers.”

Looking forward, Australia’s AiG Performance of Mfg Index, Commonwealth Bank Manufacturing Index and TD Securities Inflation figures for May could offer intermediate moves ahead of China’s Caixin Manufacturing PMI data.

Technical analysis

Nearly overbought RSI conditions and multiple failures to cross March month high of 0.6686 keep AUD/USD cautious. However, sellers are also refraining for entries unless witnessing a break of 11-day-old support line, currently around 0.6590/95.

Also read: Chart of the day: AUD/USD is at make-or-break resistance, 0.6400 or 0.6820

 

The South China Morning Post has picked up on the escalating tensions between the US and China.

In an article published over the weekend, it stated that:

US-China tensions set to worsen as moderates lose out to hardliners, observers say.

Chinese groups calling for more ‘fighting spirit’ are getting the upper hand on those who favour calm and cooperation, government adviser says.

 

Lead paragraphs

From Hong Kong to Covid-19, trade to the South China Sea, Beijing and Washington are clashing on a growing number of fronts and in an increasingly aggressive way.

Moderates who favour dialogue and cooperation as a way to resolve China’s disputes with the United States are losing ground to hardline groups bent on taking the fight to Washington, according to political insiders and observers.

“There are two camps in China,” said a former state official who now serves as a government adviser and asked not to be named.

“One is stressing the combat spirit, the other is trying to relieve tensions. And the former has the upper hand.”

Relations between China and the US are under intense pressure. After Beijing moved to introduce a national security law for Hong Kong, US President Donald Trump said on Friday that Washington would begin eliminating the special policy exemptions it grants the city, as it no longer considers it autonomous from mainland China.

Key notes

  • US Pres. Trump: Will take steps to sanction Hong Kong officials involved in eroding of autonomy

  • US Pres. Trump reportedly won’t announce additional tariffs on China

  • China: NBS Manufacturing PMI edges lower to 50.6 in May, remains in expansion territory

Market implications

This week will be very important for AUD while a whirlwind of geopolitical headlines are expected to run the show. For AUD/USD technical analysis, see here: Chart of the Day: AUD/USD is at make-or-break resistance, 0.6400 or 0.6820.

 

 

What you need to know on Monday, May 1st:

 The greenback closed the week with losses against most major rivals, hit by dismal US data and relief spurring demand for high-yielding assets triggered by US President Trump speech. Trump said that China broke its word to ensure the autonomy of Hong Kong. As a result, the US administration will begin the process to eliminate policy exemptions that give the region a special treatment. He also announced the end of the country’s relationship with the World Health Organization and announced funds would be redirected to other organizations. He did not mention new tariffs or the end of phase one of the trade deal.

On Saturday, US President Trump said he would postpone a G-7 summit until September, and expand the list of invitees to include Australia, Russia, South Korea and India in a clear move to find support against China. Russia was expelled from the, back then G-8, in 2014 amid the conflict with Ukraine over Crimea. Other G7 members have ever since refused to let the country back in. Meanwhile, an Australian government spokesman said the country would welcome the invitation.

Earlier last week, German’s Chancellor Angela Merkel said on the EU has a “great strategic interest” in maintaining cooperation with China that would remain a top priority. Tensions may surge between the US and Europe over divergent views on China.

The EUR/USD pair settled around 1.1100, finally breaking its range to the upside. The ECB and US Nonfarm Payroll would have a critical rolE this week.

GBP/USD flirted with 1.2400 but retreated and settled around 1.2350. Over the weekend, EU’s chief negotiator Barnier said UK PM Johnson he is failing to honour the withdrawal agreement signed last year, and warned there would  not be an “agreement at any cost.” The last round of Brexit talks will take place this week.

Gold closed the week around $1,730 a troy ounce, unchanged weekly basis, underpinned by mounting tensions between the US and China over different issues.

Crude oil prices surged at the end of the week, to close May with substantial gains. WTI settled above $35.00 a barrel, boosted ahead of the close by easing concerns ahead of US Trump’s speech.

Commodity-linked currencies closed the week with gains and near fresh-multi-week highs against the greenback, heading into the new week retaining their bullish stance.

The troy ounce of the precious metal closed the week virtually unchanged near $1,730 after staging a decisive rebound in the second half of the week. Although the XAU/USD pair seems to be struggling to find direction since surging to fresh multi-year highs at $1,765 earlier in May, next week’s key macroeconomic events could change that.

Coming up next week

On Monday, the IHS Markit will release the final reading of May Manufacturing PMI data for China, Germany, the eurozone, Canada and the United States. Later in the day, the ISM’s Manufacturing PMI from the US will be featured in the economic docket as well. If these data show the positive impact of reopenings on the manufacturing sector, risk-on flows could weigh on gold.

On Wednesday, the IHS Markit will publish the final version of Services PMI data for China, Germany, the eurozone and the United States. Unemployment Rate figures for Germany and the euro area will be released during the European session.

On Thursday, the European Central Bank (ECB) will announce its interest rate decision and publish the monetary policy statement. If the ECB expands its Pandemic Emergency Purchase Programme (PEPP) we could see a positive reaction in global stock markets, which could make it difficult for gold to find demand as a safe-haven.

On Friday, the Nonfarm Payroll Report (NFP) from the US will be watched closely by the market participants. 

The economic activity in China’s manufacturing sector expanded for a third straight month in May, albeit at a softer pace than it did in April, the National Bureau of Statistics (NBS) reported on Sunday.

The NBS Manufacturing Purchasing Managers’ Index (PMI) edged lower to 50.6 from 50.8 in April and came in slightly worse than the market expectation of 51.

Further details of the publication revealed that the Non-Manufacturing PMI improved to 53.6 from 53.2 in the previous month to show continuing expansion at a robust pace in the service sector.