Fundamental Forecast for CNH: Neutral
- China’s NPC released detailed agenda for the top monetary and fiscal policymakers.
- China’s low share in U.S. steel imports helps to reduce impact from Trump’s new tariffs.
- Sending high-level delegates and maintaining conversations hint China wants to avoid a “trade war”.
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The offshore Yuan against the U.S. Dollar continued to consolidate this week, marking the sixth week in a row after it hit the 2.5-year high level in early February. In the coming week, two themes will continue to dominate the Chinese news wire: the elevated tensions in trade with the U.S. after Trump administration launched the sweeping tariffs on steel and aluminium. And the on-going National People’s Congress (NPC) meetings – a full agenda has been released with events from president election to PBOC governor appointment.
Trump’s newly-introduced 25% steel tariff and 10% aluminium tariff will inevitably bring negative impact to China, but there are two important questions to ask: How much will China get hurt? And is there going to be a trade war?
Regarding the first question, China is the largest steel exporter and produced 49.2% of the world’s steel in 2017, according to World Steel Association. However, the U.S. was not one of China’s top exporting countries for steel; the top ten countries were all Asian countries including South Korea, Vietnam and Philippines. For the U.S., China was neither its largest steel source. Canada, European Union (EU), Brazil and South Korea sold most steel to the U.S. and China only accounted for about 2%. As Canada is exempted from the new tariffs, EU will be the one to get the largest hit.
For China, overcapacity is not a new topic. Since 2015, the country has already set supply-side reformsas a top target, including cuts in raw material productions. At the same time, the nation is also developing new strategies to export excessive products to where they are in need. For instance, One-Belt, One-Road Initiative is designated to strengthen China’s connection with its neighbouring countries through infrastructure investments in those countries. This will help China to export steel, cement and aluminium. As China is already working on alternative solutions for overcapacity and China’s share in U.S steel imports is small, the impact of Trump’s new tariffs is expected to be limited to China.
While Trump’s administration takes on the “American First” policy, imposing tariffs could only be a start. Then, is there going to be a trade war between the U.S. and China? Remember a war needs two parties. In February, China sent two delegates to Washington D.C., in the effort to ease trade tensions: Yang Jiechi, a top diplomat and former Foreign Minister, and Liu He, a top economic advisor and the front-runner of PBOC governor. After Trump signed the tariff proclamations, China’s Commerce Ministry criticized it publicly. Yet, Trump also had a call with Chinese President Xi Jinping on North Korea issues the next day. For China, it will address its stands; at the same time, a more rational choice will be continue to ease conflicts rather than creating more, as the country is already busy dealing with a large amount of domestic issues.
In terms of theNPC meetings, China has released moderate economic targets for 2018. The top sessions to watch over the following days are the decisions on new Chinese government leaders. It is not uncommon to see drops in Yuan’s volatility around key events such as NPC meetings. However, once the top policymakers are determined, their measures could largely impact the Yuan rate and thus getting to know them is crucial.
Upcoming Top Sessions on NPC’s Agenda
March 11th, Sunday
3pmVote for the amendment of the Constitution
Why it is important: two-year term limitation for president is to be removed.
March 17th, Saturday
9amElection of President and Vice President
Why it is important: top executive leaders will be decided.
Election of the Chairman of the Standing Committee of the NPC
Why it is important: top legislative leaders will be decided.
3pmNomination for the Premier
March 18th, Sunday
9amAppointment of the Premier
Why it is important: top executive leaders will be decided.
Election of the President of the Supreme People’s Court and the President of the Supreme People’s Procuratorate
Why it is important: top judicial leaders will be decided.
March 19th, Monday
9amAppointment of ministers, minister-level heads, including PBOC Governor
Why it is important: China’s Central Bank determines the country’s monetary policy. Ministry of Finance and State Administration of Taxation decide the fiscal policy.
March 20th, Tuesday
9amVote for the government work report
New President’s speech
Why it is important: The new president will deliver his first speech. Despite that major economic targets have already been released in the government work report. The president’s speech could cover international relations and trade topics.
Top Tier Data, Risk Aversion Portend Volatility
Financial markets may face breakneck volatility as a steady stream of heavy-duty scheduled event risk is compounded by wild swings in sentiment.
The US Dollar may continue to push higher as haven demand amid deteriorating market sentiment takes over from Fed policy bets as the catalyst du jour.
There is an argument to be made that Sterling has suffered enough and that most, if not all, of the bad economic backdrop has been priced in. But is next week the week to have that argument?
The Australian Dollar faces a week full of US economic data, but much shorter of domestic numbers. This could see USD back in the ascendant, if only for lack of AUD-specific impetus.
Chinese Yuan Forecast: Yuan May Benefit from Capital Inflows, Trade Talks and Chinese PMI
Capital inflows could remain high around June 1, when A shares are officially included in MSCI indices; trade talks may solve some discrepancies; PMI gauges could boost the outlook of a sustainable recovery.
Crude oil hit a wall as OPEC and its allies are said to increase production while total US inventories swelled by the most since February.
Equities Forecast: S&P, Dow, DAX & FTSE – A Cautionary Pause Begins to Show
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Euro Moving Towards Key Support to Curb Persistent Selling
EUR/USD TECHNICAL HIGHLIGHTS:
- EURUSD selling shows no signs of abating, close below Jan 2017 trendline sets up further weakness
- Key risk events on the calendar come in the form of Eurozone inflation and US NFP report
For the intermediate-term fundamental and technical outlook on EUR/USD, check out the recently released DailyFX Quarterly Forecast.
The theme of selling EURUSD has shown no signs of abating with the pair now trading around the mid-1.16 area. Last week saw the trendline dating back to January 2017 offer some mild support on Wednesday, however, another bout of Euro weakness saw the trendline support ultimately breached. A close below the trendline could provide a telling sign that another leg lower will be in store for the pair.
As we look ahead to next week, risk events on the calendar for the Euro will come in the form of the Eurozone inflation and the latest US NFP report. In terms price action, the aforementioned breach of the Jan’17 trendline sets up run in on the 2016 high situated at 1.1616, while a weekly low from November 7th at 1.1553 looks to be pivotal, a break below will likely see an extension of the bear run. Resistance on the topside resides at 1.1709, marking the 38.2% Fibonacci Retracement of the 1.0340-1.2556 rise, alongside 1.1750 (May 24th high).
EURUSD bulls on the longer term may find comfort in the fact that the Relative Strength Index on the daily chart is in oversold territory, which could indicate that the pair may see a modest reversal in the near-term. However, when the pair has previously been in oversold territory the rebound has been mild at best and followed by another wave of selling.
EURUSD CHART: DAILY TIMIE-FRAME (Sep 16-May-18)
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Crude Spills on Saudi’s Proposed Increase, Short-Term Top Likely
Fundamental Forecast for USOIL: Neutral
- The ONE Thing:Saudi turning on the spigots may lead to lower prices, but bullish environment remains. OPEC rhetoric is rightly center stage as oil traded notably weaker toward week’s end. Saudi Arabia’s oil minister, Ali-Falih, said he sees a ‘likely’ oil supply boost in H2 2018.
- Per BHI, U.S. Oil Rig Count rises to 859, US total count at 1059
- Crude Oil Price Forecast: Brent Premium Favors OPEC Induced Volatility
- The technical analysis picture of crude oil shows a sharp pullback off 3-year highs. Chart support comes in for the WTI front-month contract at $67.50/$64.50 per barrel.
Crude had the first weekly decline for the month of May as OPEC’s comments spooked bulls. More oil coming out of Saudi & Russia is helping to narrow a popular futures calendar spread that helped to visualize the bullish support for crude that weakened this week.
Shortage Fears Wane on OPEC+ Rhetoric
Data source: Bloomberg
Seemingly bearish rhetoric took hold of the Oil market causing the price to fall on Friday. Multiple reports came about OPEC, and their allies that are collectively known as OPEC+ as rolling back production cuts. There remains uncertainty about Venezuelan and Iranian supply that has likely supported these comments from OPEC+.
The front-month WTI crude contract broke back below $70 and calendar spreads between December 2018 to December 2019 futures contracts narrowed to the weakest levels in more than a month. The wide spread aligned the move above key resistance levels.
Additionally, owners of oil producer equities are likely not as concerned as an exposed futures traders given that many producers have been locking in high prices through hedging via options.
Crude has nearly erased May’s Gains With ~3.5% Drop Last Week
Data source: Bloomberg. Created by Quasar Elizundia
Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here
Big Pullback on 240-Minute Chart
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
The sharp pull-back is seen well with RSI(5) on the four-hour chart. The RSI(5) has hit the lowest point since crude began its impressive ascent from $58/bbl in February to above $72/bbl earlier this week.
Since the news came that Saudi and Russia are considering easing global output cuts, the price dipped aggressively lower. Oil has its first weekly loss for the month on Friday’s nearly 3% loss.
Traders can look to trendline support zone and prior structure support points near $64.50/67.50 as likely support on the pullback. A deeper move below this zone would shift me from neutral to cautiously bearish, but the broader cycle change favoring commodities makes this a difficult view to hold.
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Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Monday: US Memorial Day
- Monday: Statistics Norway releases quarterly survey on planned investments in the oil industry
- Wednesday (delayed for holiday) 04:30 PM ET: API Weekly Oil Inventories Report
- Thursday (delayed for holiday) 11:00 AM ET: EIA issues weekly US Oil Inventory Report
- Thursday 12-2pm: EIA releases monthly report
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
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