Wednesday May 27th, 2020

Sino/US tensions return with US considering actions against China as protestors return to the streets in Hong Kong over China’s proposed security law. Chinese CNY weakened vs the US$ hitting a 9-month low on concerns of possible international response to its proposed HK Security law. AUD, NZD & Asian currencies are stable to slightly weaker, while C$ & Eur extended their gains vs US$. Equity markets remain positive, oil prices are flat and US$ index vs a basket of major currencies is marginally lower. The potential for a return to “risk-off” & US$ safe haven buying remains possible as Sino/US tensions increase. Intraday the Fed manufacturing index and Fed Beige book may provide some direction, but the primary US$ driver will be the possible US response to China.

Oil prices have eased slightly from Tuesday’s highs in response to the growing Sino/US tensions over Hong Kong. C$ breached the key 1.3850 support level yesterday boosted by a “Risk-On” sentiment yesterday, supported by a rising US consumer confidence number and stronger oil prices. C$ is currently holding above 1.3730 support level, a clean breach of 1.3730 could see a possible retest of 1.3460 (March 9th lows) – resistance is now forming at 1.3850. Bias to buy US$ on dips as Sino/US tensions build and the potential for US$ safe haven buying remains.

Euro continues to edge higher despite mounting Sino/US tensions, finding support as the EU commission proposes a Eur750 bln fund, with Eur500 bln in grants. The ECB is urging governments to do more, and EU commission president will likely present a plan which will be in line with the Franco/German Eur 500bln proposal. Also supporting investor optimism for Eur is the ongoing easing lockdown restrictions ease as Covid-19 cases continue to fall and the economy is starting to return to a new normal. 1.1050 remains the key pivot point, a breach could see Eur extend to 1.1160 with potential to extend to 1.1325. Sino/US tensions and the US & International response to China proposed security law will determine if markets return to “risk-off” sentiment which will cap a Euro rally.

GBP remains stable at current levels boosted by the EU’s concession on fisheries and hopes this could be a first step to easing Brexit negotiations tensions. The UK PM continues to face criticism over his advisor who ignored lockdown restrictions, which is now impacting the PM’s approval rating. GBP remains vulnerable to further weakness as Brexit negotiations continues and the potential for negative UK interest rates remain on the table. Support sits at 1.225 with 1.2425 providing resistance.