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Market Brief
In May, China’s trade surplus reached 78.8 billion dollars, according to official data released this morning. The figure was significantly higher than expected at $58 billion. The exports increased 16.9% on a yearly basis, versus an expectation of around 8%. China’s imports grew by 4.1% as opposed to the expected 2.0%. This is fantastic news in light of the 100 shipping container vessels stuck outside Shanghai during the lockdown in May. The Biden administration may also ease some tariffs imposed by Trump, which could boost exports from China. Considering that the USA is the largest consuming nation and a net importer, there is a possibility that China will export deflation with its boom in exports. This may be confirmed by US CPI data tomorrow.
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With the Chinese yuan/renminbi weakening against the US dollar, Chinese exporters have also benefitted, so now we await a further appreciation of the US dollar and a breakout of the bull flag that is developing on the USDCNH daily chart. Two days after lifting the two-month lockdown, new cases of COVID found in Shanghai were mentioned in China’s news. As there is still zero tolerance for COVID, the economic hub may also be closed again because of the policy.
The big focus today will be the ECB monetary policy decision. It is expected that ECB President Lagarde will announce an end to the Asset Purchase Programme and then give the markets a plan for when the central bank will raise interest rates and by how much. The hawks amongst the council want to see the ECB match the Fed with a 50bps rate hike, with positive rates by the end of the year at least. The moderates want smaller steppingstone increases, so most probably around 25bps. The euro is likely to drop if there is no timeline given.
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The EURUSD has been asleep for a couple of weeks coiling around the 1.0700 level and as it happens the 9-period EMA on the daily chart. The compression is most likely to be expanded today and my hope is that they test to the downside of the channel first, with the possibility of an extension towards 1.0400. If they test to the upside to take the liquidity there, we may get stopped out of our short and have to re-enter again next week.
The yen has flipped from being the weakest currency at the start of the week to having relative strength against all the other currencies at the London open today. The US 10-year yields peaked at 3.060% in the Asia-Pac session and as the London session started dropped to nearly 3% at the time of writing. The USDJPY has been tracking the US yields very closely, so we should keep an eye on them too.
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Gold compressing at the lower bound of the rising channel looks ominous. The price action to the upside is being capped by the daily 200 EMA and if we do get a strengthening in the US dollar the precious metals group will all come off more than they already have today. Currently gold is lower by just -0.15% but platinum is down -1.74%.
Commodities like WTI and Brent are lower today and one piece of news caught my eye from China which stated that crude imports between January to May were down by -1.7%, even though it is said that China, India, and Turkey have all accepted more Russian oil since the start of the Ukraine invasion. With higher oil prices some energy suppliers turn to LNG as a source, and today the UK natural gas price has risen by a massive 40.08%, taking the weekly rise to 16.90%. The surge is due to a massive fire at a US LNG terminal.
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The EURJPY is currently trading back into yesterday’s price range and could possibly backfill a lot of the previous days, should the ECB disappoint.
However, with the ActivTrader sentiment indicator showing an extreme level of bearishness, coming in at a massive 92% of traders short. I am fully expecting another push higher in the EURJPY to stop this cohort out. A pull back to the 140.00 level would be a great test of previous resistance to see if that is where the floor is, though with this much momentum to the upside, it would take a serious disappointment with regards to rate hikes from the ECB to get such a correction.
