EURUSD closed around 1.1307 in the US session Thursday, edged down almost -0.18% on the downgrade of the German GDP, Trump trade tantrum and ongoing Brexit saga. EURUSD was already under stress on a report that the European Parliament has failed to back the launch of trade talks between the EU and the US, dealing an unexpected blow to efforts to avert a trade war. On Thursday, Trump said “if the EU does not talk to us, we are going to tariff their products. The EU has been very tough to deal with”.
After Trump’s bellicose trade comments, EURUSD slips further to a session low of 1.1294; earlier it made a high of 1.1340. As a reminder, last year Trump compared the EU with a ‘smaller version of China’ and said China is better than the EU in trade negotiations.
On late Tuesday, the USTR Lighthizer also clarified on the US-EU trade deal that there is no progress and complete stalemate: “There will not be any free trade agreement with the European Union without agriculture; discussions are at a complete stalemate on agricultural access issues”.
Talking about China trade, Trump said on Thursday (as a part of his daily ritual in an effort to keep Dow stable): ”We’re doing very well with China talks; we’re getting what we have to get but can't say if we’ll strike a final deal with China”.
Further on China trade, as per another report the US Treasury Secretary Mnuchin said on Thursday that he spoke to Liu He last night and he expects talks to be resolved in the near future and enforcement will be strong if a deal happens. Also, Mnuchin expects elements of Chinese trade discussions will be resolved in the near future.
EURUSD was also under pressure on lingering Brexit circus. Trump also offered his “expert” comments on Brexit and related issues.
Trump said on Thursday: “I am surprised how badly the Brexit negotiations have gone. The UK Prime Minister May did not listen to my suggestions on how to negotiate Brexit. I don’t think another vote on Brexit would be possible because it would be unfair. I will visit Ireland this year. The Irish prime minister is in a complicated position because of Brexit, which is very complex, tearing a lot of countries apart”.
EURUSD was also under stress on GDP downgrade by IFO and also by the German economy ministry:
On Thursday, the German IFO sharply slashed 2019 growth forecast for Germany from +1.1% to +0.6%, although, 2020 growth forecast is revised up slightly to +1.8% from 1.6%. The IFO was concerned for soft global (China) demand for German products, but strong domestic consumption and real wage growth could compensate any deficit in German export to some extent.
IFO said:
“The current production difficulties in German manufacturing are likely to be overcome only gradually. The industry will largely fail to act as an economic engine in 2019. Global demand for German products is weak, as the international economy continues to lose momentum. But domestic driving forces are still intact. A number of people employed should continue to rise even though the pace is slowing. The unemployment rate is expected to fall from 5.2% to 4.7-4.9%. Also this year, strong wage increases, a low inflation rate, reductions in taxes and social security contributions as well as an expansion of public transfers should result in a large increase in real incomes of households. This will bolster private consumption and the construction industry”.
The German Economy Ministry also warned about moderate/subdued growth in Q1, weak manufacturing, prospering services and primarily blamed external headwinds/sluggish foreign (China) demand:
The German Economy Ministry said in its March economic report:
“The economy has a subdued start to 2019. And the country has become more troubled due to higher risks and uncertainties in the external environment. This applies in particular to manufacturing with a significant fall in production in January. The weak phase is likely to continue due to sluggish foreign demand. Though, the growth to continue in other sectors, in particular, most service sectors”.
“This was underlined by a recent significant increase in employment in those sectors. With the conflicting tension between weak manufacturing and prospering services, Q1 GDP will likely increase at best moderate. The government lowered 2019 growth forecast to 1.0% back in January and will update the projections again in April”.
On Thursday, final data shows that the German headline CPI edged down to +1.5% in February from prior estimate of +1.6%, lower than the January CPI of +1.4% (y/y). On sequential basis (m/m), the German CPI also dropped to +0.4% in February, inched down from the 1st estimate of +0.5%, but stronger than the January slump of -0.8%. Overall, muted German inflation data in February was also negative for EURUSD.
On Wednesday, data shows that the Eurozone industrial production for January jumped +1.4% from the prior slump of -0.9%, higher than the expectations of +1.0% sequentially (m/m). On a yearly basis, the January Eurozone industrial production slumped -1.1%, but was better than the December slump of -4.2% and the expectations of -2.1%.
As a result of better Eurozone industrial production, soft US PPI data and delayed soft Brexit optimism, EURUSD surged +0.35%. Similarly, on Tuesday, EURUSD also jumped +0.35% on the broad weakness of the US dollar amid soft US CPI and muted core CPI.
On Monday, data shows that the German Industrial production slumped -0.8% in January from prior +0.8% (revised downwards from -0.4%) and lower than the expectations of +0.5%. Although the headline was quite soft, positive revision for December contained the damage.
Moreover, the German exports in January were better than expected at 0.00% (no growth) from prior +1.5% and an estimate of a slump of -0.5% sequentially (m/m). The German imports jumped to +1.5% from prior +0.7% (revised downwards from +1.2%) and were better than the expectations of +0.2% sequentially).
Higher imports may be an indication of higher raw material requirements for manufacturing production (export) in the coming months. The German trade surplus dropped to +EUR 18.5B from prior +19.9B (revised upwards from +19.4B) and was lower than the expectations of +21.2B. As a result of mixed German data, EURUSD was almost flat, edged up +0.08% on Monday.
Overall, economic data from the Eurozone in the last few days are better than expected, although it may be due to the benefit of the lower base and may not be termed as a “strong trend”. All focus will be now on the US-China as-well-as US-EU trade war/truce. Although the US-China trade deal may happen in late April or by H1-2019, there is no sign of any trade deal between the US-EU. Trump is now busy with China trade deal and border wall politics, while the EU is pre-occupied with the Brexit saga.
In brief, Trump trade tantrum may be the primary reason for the current slowdown in the Chinese economy and a corresponding slump in Eurozone exports/trade. And as long these trade and EU political headwinds exist, the Eurozone economic data continues to be soft.
Talking about EU political jitters, the Italian coalition government may be also at risk over a bullet train (TAV-Germany) and China’s One Belt One Road (OBOR) project. Di Maio is happy with China OBOR MOUs, while Salvini warned to oppose if national security compromised.
The Italian Deputy Prime Minister Luigi Di Maio, head of ruling Five-Star Movement, said that President Mattarella support signing up as part of China’s OBOR initiative. He noted that “I am pleased to see the president’s office has shown its support to the MOUs, which will help Italy’s port infrastructure and boost food & agri exports to China and not Chinese imports to Italy”.
On the other hand, another Deputy Prime Minister Salvini, head of coalition partner League, warned he will firmly oppose to the MOUs if that compromises national security. He also said earlier this week that “we’re absolutely not ready to do so if it’s a question of foreign companies colonizing Italy”.
The Italian Prime Minister Conte indicated that he might sign the OBOR MOUs (when Chinese President Xi Jinping visits Rome and Palermo later this month), which are non-binding in nature, but a framework agreement.
Italy’s Foreign Minister said the government is considering strengthening its ‘golden powers’ in strategic sectors in connection with China deal and the MOU with China combine the interests of open trade with those of national security. Italy’s Economy Minister Tria also said the Chinese MOU on OBOR initiative is a “storm in a teacup”.
Actually, the EU and the US is concerned over the Chinese OBOR/infrastructure deal with Italy for political reasons, but Italy and other EU nations (states) must peruse such infrastructure/fiscal stimulus opportunity to stimulate the economy out of slumber as the export-led growth in China and the US is saturating fast.
Talking about China trade policy, on Tuesday, the EU sets out 10 actions on the relationship with systemic rival China.
The European Commission (EC) sets out 10 actions to discuss the relationship with China. In the statement, the EU described China as a “cooperation and negotiating partner”. Also, it pointed out that China is a “systemic rival promoting alternative models of governance”.
The EC said: “Our aim is to strengthen our relations with China, in a spirit of mutual respect. The EU would act to strengthen its competitiveness, ensure more reciprocity and level playing field, and protect its market economy from possible distortions”.
Some notable points of the 10-actions plan by the EU on China may be quite similar to the US-China structural deal issues:
Action 5: In order to achieve a more balanced and reciprocal economic relationship, the EU calls on China to deliver on existing joint EU-China commitments. This includes reforming the World Trade Organization, in particular on subsidies and forced technology transfers, and concluding bilateral agreements on investment by 2020, on geographical indications swiftly, and on aviation safety in the coming weeks.
Action 8: To fully address the distortive effects of foreign state ownership and state financing in the internal market, the Commission will identify before the end of 2019 how to fill existing gaps in EU law.
Action 9: To safeguard against potential serious security implications for critical digital infrastructure, a common EU approach to the security of 5G networks is needed. To kick start this, the European Commission will issue a recommendation following the European Council.
Action 10: To detect and raise awareness of security risks posed by foreign investment in critical assets, technologies, and infrastructure, Member States should ensure the swift, full and effective implementation of the regulation on the screening of foreign direct investment.
On Wednesday, ECB’s Coeure said: “Italy is not a threat for Europe but it faces a technical recession and its challenge is longer-term growth. The financial sector was well prepared for risks stemming from Britain’s planned exit from the European Union and clearing, which was once deemed an issue, had been addressed”.
On Thursday, ECB’s Villeroy said: “ECB policy stance to evolve in a data-dependent manner and ECB guidance prevents premature rate hike expectations”. The market is now expecting only a 0.10% ECB rate hike by H1-2020 or even a no rate hike in the foreseeable future.
Regarding the new TLTRO-3, on Tuesday, there was a report that ECB may tailor new loans to reduce demand as the central bank policymakers want to reduce banks’ reliance on ECB cash (monetary stimulus) and will design it to curb appetite as the economy was still far stronger than a few years ago. Thus any support should be less generous, reflecting healthier fundamentals of the underlying Eurozone economy.
The report also suggested that the ECB is working on the design of the TLTRO-3 rate at a premium of +0.25% above the ECB’s main refinancing rate, now at 0.00%. Then, depending on the overall economic scenario that rate could be reduced progressively to encourage banks to meet or then exceed their lending quotas. But some ECB doves/governors are concerned that such a rate of +0.25% is too high, not giving banks enough support, and asked staff to prepare a proposal with more favorable terms. They noted that even at a 0.00% rate, it would be 40 bps more expensive than the previous TLTRO.
The report also noted that, for now, the main ECB refinancing rate of 0.00% is considered the lowest achievable rate on the TLTROs. But they said the discussion remains open and, if the economy performed worse than expected, they could opt for an even lower, possibly negative rate (NRIP). The ECB is now assessing the GDP growth outlook and may officially publish the detailed terms & conditions of TLTRO-3 in its 6th June meeting.
The report/ECB source also pointed out that a key argument for providing the loans is to roll over a previous TLTRO facility and avoid a sudden reduction in the ECB’s balance sheet and an overall possible cliff-edge effect later. But policymakers also want to reduce banks’ reliance on ECB cash. Various options under discussion include more stringent collateral rules on the new loans and more ambitious targets for lending volumes for those granted the ultra-low rate.
The report also said that while demand for the TLTRO-3 will depend on conditions. ECB calculations suggested the take-up of the new facility could be below EUR 500B, compared with more than 700B in the previous round, with many northern European banks not rolling over previous facilities as they can borrow on the market on better terms. Italian and Spanish banks can only borrow EUR 65B on top of current TLTRO-2 use, and due to deleveraging, they may not even need to roll over all of their TLTRO-2 borrowings.
The question of linking the ECB’s deposit negative rate to shield banks from negative rates had not been discussed. The ECB did not discuss tiered deposit; only one governor expressed deep concern about negative rates.
EURUSD is also getting some boost on ECB talks of less dovish TLTRO-3 (than earlier expected) and gained +0.71% in the current week coupled with some encouraging Eurozone data and delayed soft Brexit hopes. But it’s also a matter of concern about the overall strength/fragility of the Eurozone economy as it can’t handle even a +0.50 to +1.00 interest rate, while the US economy is now handing around +3.50 to 4.00% borrowing costs.
On early Friday, EURUSD is currently trading around 1.1327, surged by +0.22% on broad weakness in the US dollar after North Korea reportedly threatened to suspend talks with the US and said Kim would soon decide whether to resume nuclear and missile tests.
Technically, whatever may be the narrative, EURUSD has to sustain above 1.13450-1.13600* for a further rally to 1.13900/1.14200*-1.14800/1.15200* and 1.15700*/1.16300-1.16700/1.17400 in the near term (under bullish case scenario).
On the flip side, sustain below 1.13400-1.13200*, EURUSD may further fall to 1.12700/1.12400-1.11700*/1.11000 and 1.10600/1.10100-1.09800/1.09300 in the near term (under bear case scenario).
Pivot: 1.1345 Support: 1.127 1.124 1.117 Resistance: 1.139 1.142 1.148 Scenario 1: Strong above 1.13450-1.13600* and sustaining above 1.13900/1.14200*-1.14800/1.15200*, EURUSD may further surge to 1.15700*/1.16300-1.16700/1.17400 in the near term Scenario 2: Weak below 1.13400-1.13200 and sustaining below 1.12700/1.12400-1.11700*/1.11000, EURUSD may further plunge to 1.10600/1.10100-1.09800/1.09300 in the near term Comment: Short term range: 1.11700-1.14200