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Flood to safe havens as trade war escalates.

By Hamish Muress

After England won their opening match at a major championship for the first time since 2006 anything seems possible but some things in the FX market don’t change – notably another defeat for the government on the EU Withdrawal Bill (more on that in a moment). Way back in 2006 when Harry Kane was just 13 years old GBP/USD hit the giddy heights of 1.96, GBP/EUR traded between 1.43 and 1.50 and Theresa May was just the Shadow Leader of the House of Commons.

The fact that Theresa May was defeated once again by the House of Lords means that the bill is sent back to the Commons on Wednesday for a debate on the ‘meaningful vote’ issue. On this current course the UK is set for a soft Brexit or a ‘Brino’ – Brexit in name only. The pound has shrugged these latest Brexit developments off as investors wait for market developments on Wednesday and Thursday.

President Trump has gone another step further by threatening an extra $200bn of tariffs on Chinese imports, sparking fears that China will retaliate once again with more threats/tariffs. These tariffs have led many analysts and investors to doubt global H2 growth and as such this morning there has been a rush to safe haven assets and currencies as a risk-off sentiment prevails. GBP/USD has dropped 0.4% overnight testing lows not seen since November 2017, whilst yields on 10 year US Treasuries and German Bunds are down 5.3 bps and 3.1 bps respectively. Even the Japanese Yen has been getting involved with USD/JPY, the world’s second most liquid currency pair, testing 1.0950.

The risk of the German CDU/CSU coalition unravelling has somewhat diminished as both parties issued statements postponing decisions until after the EU summit next week. The return of the refugee crisis will certainly require delicate negotiations between Angela Merkel and her coalition partners with the long term effect being her position weakened rather than the government unwinding. The euro has largely played the same game as a host of other currencies the last 24 hours as Trump’s tariffs sees investors flock to safe havens, including the USD. As such EUR/USD will look to test the key support level of 1.1550.

The Aussie dollar continues to suffer the dire effects of Trump’s trade war as GBP/AUD tests 4 week highs once again. Indeed it gets worse for the Aussie against its US counterpart as AUD is set to test yearly lows of 0.735. Thursday’s RBA minutes couldn’t come soon enough for the currency however it is unlikely that any support will be given from the central bank.

The Canadian dollar is continuing its slide against the US dollar with USD/CAD returning to June 2017 levels. The demise of the loonie has largely been driven by Trump’s trade wars as well as this week’s OPEC meeting uncertainty. As mentioned previously, if Saudi Arabia announce an increase in oil production to take up the slack from Iran and Venezuela then oil prices could fall and with it the Canadian dollar.

Unlike its Australian counterpart, the New Zealand dollar is still largely weathering the effects of the trade war. Even the overnight flood to safe haven currencies only saw the NZD loose 70pips to the USD whilst GBP/NZD bounce off 1.9175.