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China response to Trump's tariffs with duties of their own on US goods

By OFX

The Greenback strengthened ever further to close out last week as President Trump signals $50b worth of tariffs on Chinese imports. The Chinese government then responded in-kind leading to a risk-off environment for investors and sending the USD higher. With President Trump vowing to return to Chinese retaliation with further tariffs, the stage is set for a potential trade war that may hurt global growth and risk assets.

It is a distinctively quieter week for the US dollar this week following the excitement of the Federal Reserve meeting last Wednesday. Following the ‘blackout’ period before this meeting, the market now has the opportunity to learn which way the various Fed members lean with both Atlanta President Bostic and San Fran President Williams speaking tonight. It wouldn’t be a typical week without mentioning Trump and trade tariffs (see the Iran football team and Nike), and China could retaliate further.

The US-China tariff drama weighted on risk sentiment on Friday, and commodity currencies like the loonie were the most affected on the broad USD strength move. The Canadian dollar dropped to its lowest level since June 2017, with the USDCAD closing 0.6% higher at 1.3184.

Oil was down almost 4% ahead of an OPEC meeting further weighing on the CAD, which ended up losing against all of its G-10 partners. Additionally, weaker than expected manufacturing data (-1.3% vs. +0.6% expected) intensified the move up for the USDCAD.

The loonie is opening Monday’s session even weaker, with USDCAD above the important technical level of 1.3201, which is at the moment acting as resistance. First support should now be found around 1.3071.

The trade tariffs from Trump are also set to weigh on the EZ this week with the release of Manufacturing PMI. There has been a contraction in manufacturing since the start of the year, and on each occasion, the figures have failed to meet market expectations. This contraction is probably set to continue and weigh on the EZ as Trump imposes steel and aluminum tariffs on the block.

On the political front, a more looming threat to the Euro comes from Germany as Angela Merkel is battling to hold her coalition together as the renewed migrant issue threatens to splinter the CDU/CSU government.

The euro came under severe pressure last week but managed to hold on to the EUR/USD handle of 1.15. The big question for the market this week is whether this development could be the event that break’s this support.

After a busy week last week with the ECB and Federal Reserve meetings, and then a hectic weekend at the World Cup, this evening England finally kick off their World Cup campaign. Similarly, this week is also the turn of the Bank of England as they are set to meet on Thursday then release their Monetary Policy Summary. However, the market is not expecting much from the central bank as this isn’t a ‘live’ meeting and no changes or new developments are anticipated, and a 7-2 vote split is anticipated with both Ian McCafferty and Michael Saunders dissenting (let’s hope for more action tonight with England in Volgograd or at least a similar scoreline). Currently the market is pricing in a 50% chance of an interest rate hike in August however this still seems a step too far for Carney and his colleagues and it is unlikely that anymore Brexit certainty will be in place and the Bank may also wish to wait longer for further developments on the UK economy picking back up.

With regards to Brexit and Brexit headlines, this should be the main driving force behind the pound’s performance this week. The EU summit is next week, and this will be light on development and details but heavy on rhetoric and posturing.

The Australian dollar moved sharply lower through trade on Friday slipping back below 0.75 U.S cents and touching intraday lows at 0.7440. Having driven back below the 0.76 handle mid-week after the U.S Federal Reserve delivered a somewhat hawkish monetary policy statement in support of an accelerated pace of monetary policy tightening and labor market data failed to inspire amendments to RBA policy expectations the AUD was poised for a more profound downside as investors sought to correct short-term outperformance.

Enter renewed concerns surrounding global trade policy and the introduction of $50 billion in US Tariffs on Chinese Imports. President Trump’s announced a 25% tariff would be imposed on nearly 700 U.S goods reigniting fears a tit for tat trade war will dampen demand and de-rail the global economic recovery. Risk appetite evaporated, and the AUD feel through 0.75 and 0.7450 before finding support near the year to date lows.

We expect direction will primarily be driven by investors demand risk and offshore stimuli as support hold at 0.7430, however, a break below this handle prompting a possible shift toward 0.7330/35 and 0.7280.

The New Zealand dollar finished lower for the week after seeing highs of 0.7050 in the lead up to Thursdays US Federal Reserve increase in interest rates to a range of 1.75-2.00%. A shifting focus to Europe’s ECB meeting saw a significant drive back into the US Dollar after the announcement to end QE and the Kiwi moving back lower through the 70 US cent handle.

Continuing its drive lower on Friday morning, the latest Business NZ Manufacturing Index reading was lower after the level of expansion for the sector reduced for May. The NZD/USD cross saw the last close of 0.6960 for the week and has drifted on open this morning to 0.6935. Today there is little on the horizon concerning domestic releases that will sway the New Zealand dollar as investors look towards Thursdays GDP print for the quarter whereby the forecast is a reading of 0.5%.