Asia AM Digest: US/China Trade News Lifts AUD, JPY Eyes Tokyo Open

2018-05-20 23:00:00

Daniel Dubrovsky, Contributing Senior Strategist

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Current Market Developments – Anti-Risk JPY Lower, Sentiment-Linked AUD Up
A Look Ahead – All Eyes at Asian Shares
Prior Session Recap – CAD and EUR Decline
Five Things Traders are Reading:

Current Market Developments – Anti-Risk JPY Lower, Sentiment-Linked AUD Up

The beginning of this week’s session was met with an improvement in sentiment, causing some gaps across the FX majors spectrum. On Saturday, news from the White House crossed the wires saying that China will “significantly increase purchases” of US goods and services. The following day, US Treasury Secretary Steven Mnuchin announced that they are putting the trade war and Chinese tariffs on hold.

Additional Notes from the White House:

Both sides agreed on meaningful increases in US agriculture and energy exports
US will send a team to China to work out details
US and China agreed to encourage two-way investment to create a level playing field for competition

Additional Comments from Steven Mnuchin:

Trump can always decide to go ahead with tariffs
I don’t think we are going easy on China in trade talks
US-China trade talks certainly not a failure
We are still far apart with Mexico, Canada on NAFTA. Objective is to get a deal, no timeline in mind

Amidst these developments, the sentiment-linked Australian and New Zealand Dollar’s rose at the beginning of Monday’s session. Meanwhile, the anti-risk Japanese Yen was lower. After Donald Trump casted some doubt about the progress in trade talks last week, these comments helped to reduce some of the pessimism. However, there was a lack of mention about the claimed $200 billion cut in the US trade deficit with China.

Meanwhile in Italy, a vote was held over the weekend to gauge approval of the proposed government program put together by the anti-establishment parties. The “Contract for a Government for Change” calls for a review of EU economic governance, reducing public debt (not by means of tax and austerity-based interventions) and a flat tax. According to the League party, around 91% of voters backed this program. The markets are also awaiting the next proposed prime minister which may come as early as Monday.

A Look Ahead – All Eyes at Asian Shares

A lack of critical economic event risk during the Asian session will likely put the focus on risk trend. All eyes will turn to how Asian shares react to the progress in US-China trade talks. If benchmark indexes like the Nikkei 225 rally, then the Japanese Yen could fall further yet as the Aussie and New Zealand Dollars keep climbing.

Prior Session Recap – CAD and EUR Decline

The Canadian Dollar took the spotlight on Friday as easily being the worst performing FX major. A worse-than-expected local inflation report sent Bank of Canada rate hike bets tumbling as front-end government bond yields declined. Meanwhile, the Euro came under pressure on uncertainties around Italy’s political situation. The anti-establishment leaders of the League and Five Star parties sealed a coalition agreement that puts forth policies that directly challenge the EU establishment.

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IG Client Sentiment Index Chart of the Day: AUD/USD

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Retail trader data shows 65.7% of AUD/USD traders are net-long with the ratio of traders long to short at 1.91 to 1. In fact, traders have remained net-long since Apr 19 when AUD/USD traded near 0.7781; price has moved 3.5% lower since then. The number of traders net-long is 4.0% lower than yesterday and 5.0% higher from last week, while the number of traders net-short is 5.3% lower than yesterday and 1.7% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.