• China PMI data derail the Chinese Yuan’s (CNH) recovery based on the US-China trade truce.
  • Trade developments, US PMI are on the spotlight for now.

Bears fail to compress the USD/CNH pair after Chinese PMI data as the pair recovers earlier losses while taking the rounds to 6.8388 during early Monday.

The offshore Yuan (CNH) hit the strongest level against the US Dollar (USD) while flashing a gap-down open at the beginning of the week’s trading in Asia.

However, mixed headlines from Chinese press concerning the US-China trade truce and sluggish print of the Caixin Manufacturing Purchasing Managers’ Index (PMI) triggered the pair’s up-moves then after.

China’s Caixin Manufacturing PMI for June slumped to a five-month low of 49.4 versus 50.00 forecasts. It should also be noted that a reading beneath 50.00 indicates a contraction in the activity which has been registered twice so far during the year 2019.

While sluggish fundamentals from China keep weighing on the benefits expected by the dragon nation’s latest trade ceasefire with the US, investors may wait for further developments in order to ascertain the pair’s near-term advances.

Among the key catalysts to watch, political plays surrounding the recently agreed trade peace can take the major role whereas the US Manufacturing PMI data from Markit and ISM could also offer additional direction.

The US Markit Manufacturing PMI isn’t expected to deviate from 50.1 prior readouts but its counterpart from the ISM might drop to 51.0 from 52.1.

Technical Analysis

A daily close under June month low near 6.8367 can drag the pair to 200-day exponential moving average (200-D EMA) level of 6.8016 whereas 6.8000 and April 25 high of 6.7600 may please sellers afterward. In a case of the quote’s advances, May 10 high surrounding 6.8650 and June 26 high close to 6.8918 should be given proper attention.

Prashant Newnaha, Senior Asia-Pacific Rates Strategist, TD Securities provides a detailed analysis on how to trade the Reserve Bank of Australia (RBA) interest rate decision due on Tuesday at 0430 GMT.

Key Quotes:

“TD expects the RBA to cut the cash rate tomorrow to 1%. OIS is 65% priced for this outcome. Bloomberg poll – 18/26 (70%), Reuters poll – 29/41 (70%).

RBA forecasts assume 2 cuts. The Gov had a chance to push back on pricing for a July cut of ~70% ahead of his 20th June speech. He didn't and he said "the most recent data – including GDP/Labour mkt data – do not suggest we are making any inroads into the economy's spare capacity". So why wait? For Jun Employment – 18th July, Q2 CPI – 31st July?

The RBA has refrained from inserting a bias when the cash rate has been cut. Gov Lowe's speech tmrw at 7.30pm AEST in Darwin is likely to be more influential.

We rec Jul'19 OIS/pay 3yr Sep Futs @ -14bp (3yr 99.06). Target -5bp, stop -25bp, risk A$10k/bp.”

Richard Franulovich, Head of FX Strategy and Sean Callow, Senior Currency Strategist, at Westpac offer their thoughts on the US-China trade truce and what it means for the fx markets.

Key Quotes:

“The Trump-Xi G20 meeting looks to be a modest win for China and a positive for risk assets short term but well within the range of expected outcomes.

The agreement looks lopsided: China has returned to the negotiating table by committing to more farm goods purchases, which they likely already wanted to make. It also sounds a lot like the Buenos Aires G20 pledge in late 2018 which didn’t prevent the US administration this year from subsidizing US farmers hurt by the US-China trade war.

Thornier national security issues around forced intellectual property transfer, IP theft and state subsidies are likely to be addressed in upcoming talks.

A comprehensive deal is likely to remain elusive.

Pricing for a 50bp Fed rate cut in July should be unwound further, while AUD/USD remains capped by a likely RBA easing this week.”

  • Overbought RSI limits the USD/JPY pair’s upside momentum despite clearing 2-month old resistance-line.
  • 4H 200MA can also challenge buyers during fresh advances.

Overbought levels of 14-bar relative strength index (RSI) drags the USD/JPY pair back to 23.6% Fibonacci retracement of April – June declines as it trades near 108.24 during early Monday.

While 23.6% Fibonacci retracement level of 108.10 acts as immediate support, a five-week-old resistance-turned-support-line at 107.90 may question the pair’s additional weakness.

Should there be extended downpour below 107.90, 107.40 and 107.00 may come back on the chart.

Meanwhile, pair’s rise beyond the latest high of 108.51 highlights the importance of 200-bar moving average on the 4-hour chart (4H 200MA), at 108.67 now.

Given the buyers’ ability to cross near-term key MA level, May 13 low near 109.00 grabs the spotlight.

USD/JPY 4-hour chart

Trend: Pullback expected

Heading into the OPEC+ meeting in Vienna on Monday, the Iranian Oil Minister Zanganeh noted that the cooperation with non-OPEC countries is meaningless if there is lack of unity among OPEC members.

“Some OPEC member countries have adopted path of hostility with our nation”, he added.

WTI consolidates the bullish opening gap to five-week highs of $ 59.97 while Brent keeps gains above the 66 handle.

A Japanese official at the Ministry of Economy, Trade and Industry told a briefing on Monday, Japan will tighten restrictions on exports of high-tech materials used in smartphone displays and chips to South Korea, effective July 4, Reuters reports.

This move comes in response to a lack of action by Seoul to address issues related to the top court ruling last October, which ordered Nippon Steel to compensate for forced labor during World War Two.

The official said: “South Korea has failed to show any measures on the forced labor issue … and damaged mutual trust. As trust has been lost, we cannot have a dialogue and are unable to ensure that proper export controls are being taken.”

Responding to the Japanese restrictions on trade, the South Korean Trade Ministry said they will "firmly respond" in accordance with local and international laws.

South Korean central bank’s, the Bank of Korea (BOK), Senior Deputy Governor Yoon Myun-shik was on the wires earlier this Monday, noting that the China-US trade truce was broadly in line with market expectations and would not change the Bank of Korea’s views on the domestic economy.

Key Quotes (via Reuters):

“This is positive for the short-term but uncertainty is high for the medium- to long-term.”

“I don’t think the situation has changed much since the governor presented his views in his speech.”

Reuters reports the latest comments from the Japanese Government Spokesman Suga, as he reiterates that Japan's economic fundamentals are solid and that the economy remains in a moderate recovery.

Despite the upbeat remarks from the Japanese official, the Yen keeps its renewed weakness, with USD/JPY firmer near 108.20 region.

New Zealand’s (NZ) Treasury is out with its monthly economic indicators report, with the key highlights found below.

The economy continued to expand in the March 2019 quarter with production GDP increasing by 0.6%.

The annual current account deficit narrowed as the goods and incomes balances improved, partly offset by a deterioration in the services balance.

Primary exports provided a further boost to the merchandise trade balance in May and dairy export prices should strengthen in coming months.

However, forward-looking indicators of activity are mixed, and pose a downside risk to near term growth forecasts.

On the above report, NZD/USD manages to keep the 0.67 handle, as the bears cheer the disappointing Chinese factory data amid the US-China trade truce.

  • Buyers follow the GBP/USD pair’s failure to slip beneath 200-HMA, near-term ascending trend-line.
  • 1.2667, 1.2630 seem key supports on the downside.

With its repeated bounces off the 200-hour moving average (200-HMA), the GBP/USD is taking the bids near 1.2700 during the early Asian session on Monday.

During its recovery, 23.6% Fibonacci retracement of its late-June upside, at 1.2719, is likely immediate resistance to watch ahead of observing latest high surrounding 1.2735.

In a case where prices rally past-1.2735, June 25 top near 1.2785 could become buyers’ favorites.

Alternatively, a downside break of 200-HMA level of 1.2688 can fetch the quote to 1.2667 support-line.

Should there be additional downside past-1.2667, 1.2630 and 61.8% Fibonacci retracement near 1.2612 may act as buffers during the pair’s slump to 1.2570.

GBP/USD hourly chart

Trend: Bullish