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Risk off; Kiwi tumbles as trade wars escalate

By OFX

From an open yesterday morning above 68c vs the Greenback, the New Zealand Dollar on the back of escalated trade concerns began a steady decline through Asian, European and US trade. This morning we see the pair changing hands at 0.6751 moving down strongly through some key technical levels. The Kiwi demonstrated along with the Aussie they are typically the most sensitive G10 currencies to global trade wars and as mentioned yesterday the U.S has announced its plans to impose taxes on an additional US$200 billion of Chinese goods by releasing a list of targeted products in retaliation for China's response to America's first round of tariffs. The US administration released a 195-page list of Chinese imports that will be hit with a 10% tariff. The tariffs could take effect from as early as September. It follows from the 25% tariffs on US$34 billion worth of Chinese imports into the US that took effect at midnight on Friday.

Looking ahead markets will be eyes open and ears to the ground for any further trade tension developments, It is clear that trade tensions are escalating and this escalation shows no signs of easing in the near term, creating downside risk for the global growth outlook. On the data front NZ Food Price Index (FPI) will be released, although food is among the most volatile consumer price components, this indicator garners some attention because New Zealand's major inflation data is released on a quarterly basis which is next week.

The Australian dollar was dealt a blow on Wednesday after the United States decided to impose tariffs on an extra $US200 billion ($270 billion) worth of imports from China, fuelling fears of a full-blown trade war. As a result the Aussie dollar fell to an overnight low of 0.7360, down almost 1 per cent since early June when worries of a trade war began.

Yesterday on the local data front the Westpac Consumer Confidence index resulted at 3.9%, an improvement from the previous 0.3%, while Home Loans were up 1.1% in May, against the expected -1.9%. Looking ahead today and Australian Consumer Inflation Expectations for July will be released at 11.00am, previously at 4.2%.

From a technical perspective, the AUD/USD pair is currently trading at 0.7362. We continue to expect to hold on moves approaching 0.7340 while now any upward push will likely meet resistance around 0.7400.

The Great British Pound opens lower this morning as softness across key macroeconomic indicators and ongoing political turmoil weighed on investors appetite to extend interest rate expectations. Weaker than anticipated Manufacturing Production and Goods Trade Balance data hampered brief upward forays while month on month GDP failed to spur short term momentum. Falling through 1.3250 Sterling tested weekly at 1.3200 as attentions turn again to political instability.

The ructions within the May government have only heightened concerns surrounding the Brexit process and raise questions as to whether British negotiating power has been weekend. The uncertainty dampens expectations for an August rate hike and outweigh tentative signs of recovery after a Q1 slowdown. This week we have seen expectations for a rate adjustment fall from 60% to 50% compounding the GBP sell off and opening the door for a broader move toward psychological support at 1.30

Attentions now turn BoE governor Carney as he address the National Bureau of Economic Research with investors keenly attuned to any hint a monetary policy amendment is on the table.

Overnight, the United States Dollar strengthened against all crosses with the DXY Dollar Index surging 0.6%. Again, the catalyst was a combative President Trump who outlined his plans to escalate the trade war.

The Trade War entered a new phase yesterday with President Trump determined to aggravate Chinese interests by pledging to impose an additional $200b tariff on Chinese goods. A US trade Representative confirmed that the 10% tariffs could take effect as early as the 30th of August after a consultation period. Unsurprisingly, China condemned the move and affirmed their commitment to respond in kind. The latest development caused markets to retreat across the board with equity, bond and commodity markets falling. The Greenback and Japanese Yen, the stalwart safe havens for foreign exchange, lurched higher while commodity currencies bore the brunt of the declines.

Moving forward, markets remain alert for any further news from the President as the global trade climate continues to evolve. The US economic calendar also piques investor interest with US CPI inflation data slated for release later in the session.

Broad USD strength following US threat of more tariffs on China imports, a stronger than expected US PPI number (a good gauge on inflation, came at 0.3% versus 0.2% expected), and a FED official saying US growth is strong and that they are comfortable with rising rates more than anticipated at the start of the year. EURUSD traded 0.60% lower, breaking below 1.17 and closing around 1.1675.

The Euro managed to reach a session high above 1.1750 versus the greenback on rumours that some ECB members were not aligned on the timing for the next interest rate hike, but it then reversed the gains following US data and FED comments.

New support and resistance levels now stand around 1.1650 & 1.1756

A very volatile session for the loonie, it strengthened 0.8% versus the USD with USDCAD dropping to a session low of 1.3065 following Bank of Canada interest rate hike to 1.50% and bullish comments by BOC chief Poloz indicating that they saw a need for higher interest rates even taking into consideration trade risks. Unfortunately, the loonie couldn’t hold its gains and reversed track on broad USD strength and a slump in oil prices. USDCAD ended the session 0.70% higher (CAD weaker), breaking through the 1.32 resistance level at 1.3206.

Next levels to watch are 1.3155 and 1.3225 on the upside.