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US announces further tariffs on Chinese imports

By Alex Edwards

The pound was one of the best performers of the day, rallying around 0.70% on Monday from 1.3067 to a high of 1.3164, a level not witnessed since the start of August. The main catalyst for the move was on the back of hopes that there was progress being made in the Irish border Brexit question. The Times newspaper reported yesterday that the EU was prepared to accept a frictionless Irish border post Brexit which increases the probability of a withdrawal agreement deal by the end of the year.

Meanwhile, on the data front, house prices rose by 0.7% in September, after falling by 2.3% in August, according to Rightmove. The annual pace of house price growth edged up to 1.2% in September, from 1.1% in August.

Looking ahead, The Prime Minister is set for another round of Brexit negotiations this week and the pound has shown various occasions in the past couple of weeks that it remains highly sensitive to Brexit headlines. There’s no UK economic data due for release.

The dollar fell on Monday after White House economic advisor Kudlow said that additional tariffs against China were forthcoming. And they were, as later in the day US President Trump announced tariffs on $200 billion of Chinese goods, adding that if China retaliated he’d impose a further $267 billion of tariffs on imports. If anything though, the USD has recovered slightly as risk is sold.

On the data front yesterday, the New York Empire manufacturing index fell from a ten-month high of 25.6 in August to a five-month low of 19.0 in September. Some fall in the index was not surprising, given the toll the trade wars could be having on confidence. The index however, is volatile, and the sub-indices on activity remain elevated.

Looking ahead, the economic calendar is fairly light, but attention turns to China as traders will keen to hear what the response, if any, will be to the US action. We’re already hearing various comments albeit there’s been no immediate concrete action taken as of yet.

EUR/USD pushed higher through the day yesterday. The pair traded as high as 1.1717 early this morning and has settled only slightly below the big 1.17 figure in London opening this morning. The greenback showed some broad weakness against all rivals yesterday, including the single currency. The US action on China has been the main driver over the last 24 hours, and markets are now trading with a “risk off” tone following the latest headline.

On the domestic front, the EU annual inflation was confirmed at 2% while the core reading came in at 1% as expected. M/M headline inflation was 0.2%, a steady improvement on the previous -0.3%. Ultimately the numbers came in as widely expected and had little effect on the euro. Moving into Tuesday, Traders will keep a close eye on the US-China trade conflict, and moreover any signs of retaliation from China, as well as ECB Mario Draghi’s speech for direction.

The Australian Dollar ground its way upwards in overnight trading, moving towards and through the key 0.72 level. It traded to an overnight high of .7220 as the US/China trade headlines pushed the greenback lower. Ever since the tariffs were announced/confirmed the aussie has fallen back, as risk demand looks a little wobbly and AUD/USD trades just shy of the .72 figure this morning.

In the very near term, rhetoric and retaliatory comments from China will likely determine the aussie dollar’s fate. There’s been no detail released on any of China’s countermeasures yet though.

Monday saw the Canadian Dollar finish largely unchanged against the greenback as investors adopted a ‘wait and see’ approach ahead of potential trade news, with Reuters also reporting that traders are structuring options contracts to bet on near term CAD volatility. The loonie, which rose nearly 1% last week, traded in a tight range between 1.3002 and 1.3048 as softness in oil prices and deepening trade war rhetoric continued to weigh on the domestic unit.

Second tier housing data released yesterday also showed resales of Canadian homes rose 0.9% in August realising its fourth straight monthly rise but still below long run averages. As expected, the release did little to move markets with traders already looking forward to domestic inflation and retail sales, which are due out on Friday.

The New Zealand dollar is slightly stronger this morning when valued against the U.S. Dollar. The kiwi traded at a high of 0.6607 overnight as US/China trade developments took a grip. But investors are hesitant to sell the kiwi ahead of this week’s key New Zealand data releases, including the latest quarterly Gross Domestic Product growth figures. On that note, PM Arden said overnight that she had seen the data and was “pleased” with it, only for spokesman than to say she had been mistaken and she had not seen the GDP number. NZD/USD was largely unaffected by it.