News & analysis

The dollar continues to trade weaker in today’s session despite news of rising US-Sino tensions after the US imposed restrictions on semiconductor sales to Chinese telecommunications company Huawei.

Additionally, comments from White House trade advisor Peter Navarro add to the growing complaints from the Trump administration over China’s containment of the pandemic.

Although the potential for another phase of the US-China trade war is likely, markets continue to trade in a risk-on mood as major global economies start to scale back lockdown measures.

WTI is back above $30 a barrel, boosted further by comments from China, while Angela Merkel and Emmanuel Macron are set to announce a new Franco-German initiative this afternoon at 16:00 BST. Elsewhere, comments from the Bank of England’s chief economist, Andy Haldane, regarding negative interest rates and other unconventional monetary policy tools put the pound lower this morning. However, this didn’t last with the dollar continuing its losses and now GBPUSD sits near 0.5% higher on what is broadly a quiet day for markets.


G10 broadly rallies against a softer dollar despite US-China trade tensions threatening to rear their head again

  • US-China trade tensions are re-emerging as a trending topic in markets as the US administration increases the tone of accusations over China’s active role in the global outbreak of the pandemic. The US has already taken action last week, after it prevented foreign chipmakers using US technology from supplying components to Huawei or any of its 114 subsidiaries without a license. The move is intended to curtail the company’s ability to produce its own chips for smartphones on the basis of Huawei´s close ties to the Chinese government posing a threat to US national security. Chip manufacturing makes up for nearly 90% of the company’s overall revenue. China threatened retaliation on this and further moves, with a state-run newspaper hinting on a series of countermeasures without further detail. The restrictions may freeze the entire chipmaking industry because of its wide use of US fabrication plants.
  • While recent institutional frictions within the EU and re-emerging US-China trade tensions have put a lid to the euro price action, gradual reopening plans have kept the single currency supported above 1.08 level. As the number of new cases and fatalities falls across the eurozone, the region is gradually moving towards easing lockdown restrictions, although at different paces.
    • In Italy, the worst hit country, retail businesses are open as of today with strict social-distancing precautions. The reopening date for bars, restaurants and hair salons was also moved to today from June 1st However, according to the Confcommercio retail lobby, one in ten Italian businesses is at risk of failing, amid criticism that state help hasn’t reached small businesses as promised. A move deemed as a “calculated risk”by Prime Minister Guiseppe Conte, Italy eyes the reopening of domestic and international borders on June, 3rd; while sports centres and theatres are planned for reopening on May, 25th and June 15th respectively.
    • In Spain, the government has kept its phasing out program of the national lockdown, with the Valencia region joining the half of the country already in phase one. Some islands will enter the second of four phases as well. However, the government is seeking support in Parliament to extend the state of emergency by an extra month , set to end on May 23rd, which major opposition parties refuse as they seek alternative options for managing the easing of lockdown.
    • Portugal launches the second phase of the scaled-sector plan as of Monday, where restaurants, museums and coffee shops are included at reduced capacity.
  • Headlines broke this morning that a scheduled meeting between French President Emmanuel Macron and German Chancellor Angela Merkel will take place later today at 3:30pm Paris time. The agenda for the meeting hasn´t been disclosed yet but will likely include a discussion on the European recovery fund, along with a range of topics covering public health, green and digital transition and industrial sovereignty. The two countries have lead opposing positions on the EU joint policy response to the pandemic, with Germany largely refraining from the issuance of collective “coronabonds” proposed by France. The European Commission recently hinted at the prospects for a softer aid plan, in which some of the intended €2 trillion fund would be delivered as grants to member states, as opposed to loans. The euro is modestly abandoning the range-bound price action from this morning, in hopes of crucial guidelines to emerge from today’s meeting. Reporters will have access to the meeting details at 16:00 BST.
  • Sterling was pushed into negative territory this morning as the bank of England’s chief economist, Andy Haldane, told the Telegraph newspaper that the UK is heading towards an unemployment crisis comparable to that of the 1980’s, while the central bank is considering negative interest rates and unconventional tools. The commentary pushed overnight interest rate swaps to price a negative bank rate as early as December’s meeting. Haldane made similar comments to the same newspaper back in 2015, but with both Governor Bailey and Deputy Broadbent vocally dispelling the likelihood of negative rates it still remains a distant possibility.
  • Additionally, this week the pound faces UK public sector borrowing data on Friday. Expectations suggest borrowing is expected to come in at around the £20bn mark for April, with considerable upward revisions to come in the future to both the March and April debt. This comes after the country’s fiscal watchdog said that in the scenario where the UK remains in lockdown for the whole of Q2, resulting in the economy contracting 35% QoQ, that the fiscal deficit would rise from £218bn to £273bn in FY20. This would result in a fiscal deficit of around 14% of GDP – the highest since World War II and 4% higher than the peak of the financial crisis. With this in mind, the Chancellor of the Exchequer Rishi Sunak is set to face questions in Parliament between 14:25 – 16:00 BST after extending his job retention scheme until October last week. Markets can expect questions to focus on how the government aims to finance the ever-increasing fiscal deficit.
  • WTI is at a two-month high after production data shows a sharp drop in both OPEC+ and North America, while Chinese officials announced that oil demand is almost back at pre-virus levels. OPEC+ is well on the way to slashing output as reports suggest 9.7m barrels per day of output have already been scaled back. Additionally, data out of North America shows production in the US has reduced by 1.5m bpd, with a 700,000bpd fall in Canada. US exports of oil is also estimated to have fallen 15% since the collapse in prices.
  • Over the weekend, Swiss National Bank Governing Board member Andrea Maechler highlighted the SNB’s increased efforts to offset market forces as CHF continues to appreciate on haven flows. The comments follow that by SNB Governor Jordan, which have also been supported by data on sight deposits – a proxy for the central bank’s intervention in FX markets to weaken the franc. Maechler avoided questions about the SNB directly defending the 1.05 level on EURCHF, stating that the central bank takes the general foreign exchange situation into account, but the market has failed to drive below it despite multiple attempts. Today’s sight deposit data suggests this may be the threshold for the SNB as CHF4.4bn was added to the SNB’s balance sheet in the week ending May 15th.


WTI crude prices break the $30pb mark for the first time in one month in thinner trade volumes


The euro gains some traction ahead of the Macron-Merkel meeting this afternoon

SNB steps up the pace of FX intervention as it resists further franc appreciation


Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst



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