China Hits Back, Leaving the Ball and the USD in Trump’s Court

Earlier in the Day:

While a number of key markets were closed today for Easter Monday, economic data released through the Asian session this morning was on the heavier side. Japan’s 1^st quarter Tankan survey numbers were released together with China’s March Caixin manufacturing PMI.

For the Japanese Yen, the only positive was larger than forecasted CAPEX in the 1^st quarter, rising by 2.3% compared with a forecasted 0.6%, though even this was ultimately a negative for the Yen, with CAPEX significantly lower than the 4^th quarter’s 7.4%. Next quarter’s revised numbers will be watched closely, Japanese companies having a tendency to understate estimates.

The significant fall in the CAPEX figure will raise some concerns over the Japanese economic outlook however, as Japanese businesses also saw sentiment deteriorate for the first time since 2016, with Yen strength, fears of a possible trade war between China and the U.S and the impact of rising commodity prices weighing, while continued upbeat sentiment towards the global economy and Japanese goods offset some of the negativity.

The Tankan Large Manufacturing Index slipped from 26 to 24 in the 1^st quarter, falling short of a forecasted 25, while the Tankan Big Industry Outlook Index rose from 19 to 20, falling short of a forecasted 22, with the non-manufacturers index holding falling from 25 to 23, the first decline in 6-quarters.

The Japanese Yen moved from ¥106.278 to ¥106.355 against the U.S Dollar upon release of the figures, before moving to ¥106.35 at the time of writing, down just 0.07%, China’s response to U.S trade tariffs providing some support through the session.

With the data out of Japan disappointing, China’s Caixin manufacturing PMI number also failed to impress, with the March PMI easing from 51.6 to 51.0, falling short of a forecasted 51.7.

The survey showed new orders growing at the slowest pace since the end of last year, the decline coming off the back of only a marginal uptick in new orders from overseas, with production rising at the slowest pace since November, the slower pace of growth attributed to weaker demand.

Today’s numbers were in contrast to the government figures that were released on Saturday, which showed that activity in the manufacturing sector picked up in March, the government PMI numbers covering the large State Owned Enterprises.

The AUD/USD moved from $0.76873 to $0.76846 upon release of the figures, the Aussie Dollar used as a proxy for trade and manufacturing figures out of China, before easing back to $0.7675 at the time of writing, down 0.05% for the morning.

While the data had some influence on market sentiment through the session, with trading volumes on the lighter side, of greater significance was China’s announcement of tariffs on close to 130 U.S goods, including 25% import tariffs on pork and 15% on fruit.

The Chinese government looked to soften the message by stating that there was no desire to escalate tensions, whilst noting that tariffs on Chinese steel and aluminium was having an adverse effect on China’s interests.

In spite of the retaliatory tariffs and the softer manufacturing PMI number, the Nikkei was up 0.39% at the time of writing, with the CSI300 up 0.14%, holding on to positive territory, after coughing up more sizeable gains made through the early part of the session.

The Day Ahead:

For the EUR, there are no economic stats scheduled for release today, with major member states including France, German and Italy closed for Easter Monday.

Market sentiment towards China’s response to the U.S trade tariffs and this afternoon’s manufacturing PMI numbers out of the U.S will be left to influence the EUR, the bigger concern likely to be EU trade terms coming under the microscope, though this year’s gains in the EUR will ease some of the pressure on the U.S to hit the EU with particularly punitive tariffs, especially at a time when the U.S will be looking towards the EU for support for fresh sanctions on Iran, something that the EU has been against since Trump’s election campaign.

At the time of writing, the EUR was down 0.06% to $1.2316.

Across Le Manche, the UK markets are also closed for Easter Monday, with no material stats scheduled for release this morning.

For the Pound, recent economic data, a more hawkish Bank of England and optimism over Brexit are positives that will have contributed to early gains, with little to influence ahead of tomorrow’s Manufacturing PMI.

At the time of writing, the Pound was up 0.18% to $1.4040.

Across the Pond, the U.S markets reopen after Friday’s holiday, with economic data scheduled for released out of the U.S limited to March manufacturing PMI numbers. The markets will likely pay more attention to the preferred ISM survey figures, with the Markit Survey numbers finalized figures unlikely to deviate too far from prelim figures released last week.

Forecasts are for the manufacturing sector to see marginally softer growth, with data in line with or better than forecasted likely to be positive for the Dollar, though the devil may well be in the details. We will expect wholesale price inflation and new orders to be the main area of focus this afternoon.

At the time of writing, the Dollar Spot Index was up 0.04% to 90.012, with direction through the day not only hinged on today’s stats, but also how the U.S administration responds to China’s trade tariffs.