Friday May 22nd, 2020

Sino/US tensions increased on the news that China is planning to implement a new national security legislation in Hong Kong. The US President responded saying that Washington would react “very strongly” to Chinese proposals to the change of law in Hong Kong. Also in China, the National People’s Congress for the first time abandoned setting an annual GDP target, causing some doubts about the pace of China’s recover. The rising Sino/US tensions saw investors reverse to “risk-off’ safe haven buying, causing equity, commodity and currencies to come under renewed selling pressure. US$ index vs a basket of major currencies strengthen as it awaits the US’s response to China’s proposals in HK. With no key data releases out of the US today expect the US tensions and US’s response to dictate direction.

Oil prices fell 5% primarily on Sino/US tensions and on growing doubts about the global pace of demand for oil as lockdown restrictions ease. The drop-in oil prices saw C$ sell off quickly from its recent highs retesting 1.4000 vs US$ level. The rising US/China tensions and falling oil prices will have a negative impact on C$ and the currency has the potential to retest 1.4150 next. Canadian Retail Sales data to be released this morning are expected to show a fall of -10% vs +0.3 last. Intraday Retail sales data, Sino/US tensions and Oil will dictate direction today.

Euro weakens vs US$ as Sino/US tensions rise, causing markets to reverse to a “risk-off” stance. Euro continues to hold above 1.0880 support level as it awaits the minutes from the latest ECB meeting and also ECB Lanes speech today. The German Finance Minister announced that tax revenues plunged 25.3% due to Covid-19 and expectations revenues will remain low into Q3. Intraday markets will be watching the US’s response to China’s national security legislation in Hong Kong for direction. A break of 1.0880 expect a test of 1.0770 with resistance remaining at 1.1000.

GBP weakened as UK retail sales fell by a record 18% and Public sector borrowing leaped from GBP 14bln to GBP 61bln (the highest on record), both data releases highlighting the impact of covid-19 on the UK economy.  Adding to GBP pressure is the strengthening US$ on safe haven buying pushing the Pound towards its key 1.2165 support level. No key data out of the US today, so markets will focus on the ongoing Sino/US tensions for direction. Next support level 1.2070, if breach opens the potential for 1.1775 next, with resistance remaining at 1.2250