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US Trade War Threatens

Market Overview:

Markets closed the week out weaker with currencies all down against the US Dollar with equities and commodities also depreciating. The US Dollar Index climbed to 94.89 with risk shifting to negative sentiment. The Trump administration announced its China tariffs stipulating a 25% charge on up to $50 Billion in Chinese products. Based on the news the DOW fall over 200 points and the S&P shed 0.4%. Donald Trump said the measures would affect products “that contain industrially significant technologies” but did not specify which products, this has come after Trump made the comment “in light of China theft of intellectual property and technology and its unfair trade practices”. Trump also said he would impose further tariffs on Chinese goods if they retaliated with their own set of duties on American made products. Over the weekend China, as expected, retaliated taking aim at US goods such as soybean and corn with further progress being made to tax coal, crude oil, gasoline and medical equipment. Sounds like this is a full-blown trade was to me. Back in April President Trump initially announced tariffs of 100B with China, perhaps we may see this figure come to the foreground yet if President Trump does not get what he wants? The New Zealand Dollar remains on the back foot from the decline from 0.7050 with further downside expected. There is little to speak of on the Australian Calendar this week, but we will see monetary policy minutes to shape the Aussie week with the pair trading perilously close to support of 0.7440 – a 15 month low against the greenback. The Bank of England (BoE) releases their monetary policy Thursday, we expect rates to remain on hold with the vote being 7-2 in favour and shy away from recent speak of hiking interest rates with terrible first quarter 2018 being a temporary blip. A hike in August is possible. If Trade talks remain in the headlines currencies should remain offered and drift lower over the week.

Australia

A light economic calendar is in store this week with only House Price Index to release. June Monetary minutes is out on Tuesday with the standard recent bore expected from Lowe regarding weaker wage growth and a cash rate hike when they are good and ready once wage growth looks better. Australian Unemployment has fallen from 5.4% to 5.5 but had little upside effect on the declining Aussie. Low will also speak on Thursdayfrom Portugal at the European Central Bank Forum.

New Zealand

The New Zealand Dollar (NZD) has been choppy over the past few days with the cross digesting new tariff headlines between China and the US. Markets spent the week focusing on the Singapore Summit between Kim Jong-un and President Trump with markets initially perceiving news as positive for world geopolitical health. Markets quickly focusing on the FED as they raised the cash rate from 1.75% to 2.00% as predicted but the news of a possible further 2 hikes in 2018, as opposed to one, had markets in a spin. NZ Manufacturing figures printed well at 54.5 but failed to advance the kiwi higher in the wake of the Fed announcement. Locally recent growth statistics points to a softer outlook with 2018 expected to peak at 3.2% for the year to 2020 before dropping to 2.9% in 2021. Quarterly GDP figures are released Thursday, 0.5% is the expected figure – down on the March number of 0.6%. I would be surprised if the New Zealand Dollar doesn’t close the week lower.

United States

President Trump has again stolen the headlines again with further demands of tariffs on the Chinese. The Trump administration announced its China tariffs stipulating a 25% charge on up to $50 Billion in Chinese products. China has retaliated by focusing on American Agriculture and energy which affect the rural states, ironically the very people which voted for Donald Trump to be President back in 2016. The world’s largest commodities consumer said they would levy round one of tariffs on $US 34B worth of agricultural products as well as cars from the 6th of July 2018. Further tariffs of $US 16B will be introduced on coal and oil later. The greenback (USD) closed the week out in the black again, helping was Retail Sales which was well up on the expected 0.5% at 0.9%. The US Dollar may strengthen further if intl trade discussions continue.

Europe

The ECB announced their cash rate with no change as was widely expected and laid out plans to wind down its EUR 2.5T bond buying program by December but said it didn’t expect to raise rates until at least until the end of 2019. As we spoke about previously, this sank the EUR to around1.1550 levels where it has consolidated since Thursday. Markets are expecting a possible kick higher through 1.1620, if this eventuates we could see 1.1660 targeted against the greenback. Trade wars – yes I’m calling it a war now, will play a part in direction over the coming days. We also have a plethora of data to keep things interesting including several ECB speakers and pivotal economic indicators such as German Manufacturing figures.

United Kingdom

The Bank of England release their official Cash rate this week with markets expecting no change to 0.5% currently. The voting should represent a 7-2 against a change with 6-3 also possible. Growth for the first quarter 2018 has been slow with a possible signal that an August 2018 increase to 0.5% could be expected. The current Quantitative Easing Policy will also get a mention Thursday when discussion will take place around the 435B program instigated during the 2008 financial crisis. Year on year – Consumer Price Index (CPI) also published at 2.4% as economists predicted. Motor fuel prices made up the biggest portion of increased cost between April and May with Food and Alcohol decreasing. Producer Price Index also published higher for May with 2.8% inflation as opposed to 1.7%. This crucial data has buoyed the British Pound late last week at it came off a low of 1.3215 Friday and closed at 1.3270.

Japan

The Bank of Japan met on Friday and voted 8-1 to leave the benchmark rate on hold at minus 0.10% and its target for the year on 10-year government bonds at 0% The bank also vowed to keep its inflation target at 2%. The Bank of Japan governor said it was too early for the Bank of Japan to talk about winding down its stimulus program even though other central banks are starting to. He continued” it’s appropriate for Japan to patiently continue current monetary easing, with the divergence of monetary policies reflecting the different economic conditions in each country”. Kuroda will speak again on Thursday at the Central bank forum in Portugal. May’s Trade Balance has come in at JPY578B well below the expected 202B. Exports were much higher than predicted but the problem was imports also ran well higher than economists thought.

Canada

The Canadian Dollar (CAD) has slipped to 1.3200 on trade tensions. On Friday the greenback rose against the Loonie pushing above 1.3200 for the first time since June 2017. The Canadian Dollar has declined five of the last 6 weeks. US President Trump imposed further tariffs on Chinese products with China retaliating with their own set of tariffs on American made imported products to China. With the US slapping tariffs on Canadian Steel and the Nafta talks stalling it’s not surprising we have seen investor anxiety rising. President Trump is expected to impose further tariffs on Chinese products this week which will have a detrimental effect on risk appetite and no-doubt way on the Canadian currency. We expect a retest of the May 2017 high of 1.3800 over the following weeks.

Major Announcements last week:

  • Federal Reserve hikes rate from 1.75% to 2.00%
  • Risk sentiment falls away on the weekly open
  • Equities and commodity products all down
  • Australian Employment drops to 5.4%
  • UK Retail Sales up 1.3% from 0.5% expectations
  • US Retail Sales prints at 0.8% with 0.4% expected
  • Japan leave the benchmark rate at -0.10%
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