Yen trades generally higher in Asian session today on mild risk aversion. Escalation of trade tension between US and China is a factor weighing on sentiments. The 6.1 earthquake in Osaka also pressures Japanese stocks. Nikkei is trading down -0.8% at the time of writing. Euro is broadly lower on ECB rate outlook and is set to weakens further. Sterling follows as the second weakest. In other markets, Gold trades mildly lower but is capped well below 1300 handle. WTI crude oil also trades low and is pressured before 64 handle.
Economic calendar is light today. UK Rightmove house prices rose 0.4% mom in June. Japan surprising recorded JPY -0.30T trade deficit in May. US will release NAHB housing market index later in the day. Though, a number of central banks are scheduled to speak, including Fed’s William Dudley, Raphael Bostic, John Williams; BoC’s Lynn Patterson and ECB’s Mario Draghi
Technically, while Dollar was strong last week, EUR/USD is holding above 1.1509 near term support. GBP/USD is also held above 1.3203. These two levels are critical on whether Dollar can resume recent up trend in near term.
A quick recap on US-China trade war
Here’s a quick recap on US-China trade war. Last Friday, the US Trade Representative formally announced the section 301 tariffs on Chinese imports, targeting products related to the Made in China 2025 policy. There are two set of tariffs lines. The first set contains 818 lines of the original 1,333 lines announced in April. This set covers around USD 34B of Chinese imports. 25% tariffs will be imposed starting July 6, 2018. The second set contained 284 proposed tariff lines, covering around USD 16B in Chinese goods. This set will undergo further public view before finalizing.
Soon after, China announced the retaliation measures, targeting USD 50B of US products. The first set of productions include soybean, agricultural products, automobiles. These products are valued at around USD 34B, will be subjected to 25% tariffs, starting July 6, 2018. China would also impose 25% tariffs on other products, valued at around USD 16B, including chemicals, medical equipment, and energy products. Effective date is to be determined.
Stopping war games could weaken US rationale to ask South Korea to pay more
The Yonhap news agency reported that South Korea and the US would announce suspension of large scale joint military exercises this week, amid the negotiations with North Korea on denuclearization. A “snapback” clause, though, would be included if North Korea fails to deliver its promises.
Yonhap also reported that suspension of the exercises could “weaken Washington’s rationale for an increase in Seoul’s share of the cost for the upkeep of 28,500 U.S. troops in the country.” And the US has been demanding the South to pay more. There will be a fourth round of so-called burden sharing costs negotiations in Seoul later this month.
Meanwhile, Trump also made clear it’s his request to stop the “war games” as they are “very expensive” with his tweet.
BCC: UK economy in a torpor amid Brexit uncertainties, rate hikes, trade war and oil prices
The British Chambers of Commerce slightly downgraded UK growth forecasts for 2018 to 1.3%, from 1.4%. For 2019, growth projection was downgraded to 1.4%, from 1.5%. And it said that, if realized, 2018 would be the weakest year since 2009. And it warned that the economy is in a ” torpor, with uncertainties around Brexit, interest rate rises, and international developments such as a possible trade war and rising oil prices” all having an impact.
BCC said in a statement that “the downgrades have been largely driven by a more lacklustre outlook for consumer spending, business investment and trade”. And, growth in real wages is not expected to “translate into materially stronger spending over the forecast horizon”. And “weak productivity” would continue to limit wage growth. Household finances will remain “stretched amid historically low household savings and high debt levels.”
Business investment growth is expected to slow sharply to 0.9% in 2018, down from 2.4% in 2019 on Brexit uncertainties. Next trade position is also expected to “weaken over the next few years”. Services growth is projected to slow to 1.2% in 2018, weakest since 2010.
NZIER: Growth and NZD expectations lowered
The NZ Institute of Economic Research downgraded growth forecast for the New Zealand economy. Weaker exports “drive much of this downward revision in near term”. But from 2019 onwards, “expectations of weaker growth in investment explain the softer growth outlook”. Though, NZIER noted that expectations for growth remain reasonably healthy through to 2021.
Real GDP growth is projected to be 2.8% in 2017/18, 2.9% in 2018/19, 3.2% in 2019/20 and 2.9% in 2020/21. That compares to March survey result of 2.9% in 2017.19, 3.1% in 2018/19, 3.3% in 2019/20 and 2.9% in 2020.21. .
NZD expectations were also revised lower. NZIER pointed to Fed’s rate hike in the coming year. Meanwhile, RBNZ is expected to keep OCR on hold “until at least the middle of next year”. And, “this should reduce the yield attractiveness of the NZD, and hence weigh on the currency.
New Zealand Dollar TWI is projected to average at 75.5 in 2017/18, 72.6 in 2018/19, 72.3 in 2019/20 and 72.0 in 2020/21. That compares to March survey result of 75.2 in 2017/18, 73.1 in 2018/19, 73.1 in 2019/20 and 72.8 in 2020/21.
NZIER also noted that RBNZ’s May MPS indicates that “interest rates were just as likely to go down as up.” Nonetheless ” the central bank’s forecasts indicate the OCR is likely to increase, although not till later in 2019. Consensus Forecasts for interest rates have been revised slightly lower from 2019.”
BoE, SNB and OPEC to highlight a relatively light week
Looking ahead, BoE and SNB rate decisions are two major focuses this week. Both are expected to stand pat on monetary policies. It’s uncertain whether BoE is ready for a rate hike in August, but we’re not expecting any hint from this week’s announcements. RBA and BoJ minutes will also be watched. Economic data is a bit on the light side with major ones scheduled towards the end of the week. New Zealand GDP, Eurozone PMIs, Japan CPI, Canada retail sales and CPI are the more important ones. Also, OPEC’s decision on raising production could have a negative impact on oil price and Canadian Dollar.
- Monday: US NAHB housing market index
- Tuesday: RBA minutes, house price index; Swiss SECO economic forecasts; Eurozone current account; US housing starts and building permits
- Wednesday: BoJ minutes; German PPI; US current account, existing home sales
- Thursday: New Zealand GDP; Swiss trade balance, SNB rate decision; UK public sector net borrowing, BoE rate decision; Canada wholesale sales; US Philly Fed survey, jobless claims, house price index, leading indicators
- Friday: Japan national CPI core, PMI manufacturing, all industry index; Eurozone PMIs; Canada retail sales, CPI; US PMIs