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Trump Tariff’s Continue to Dominate Economic Headlines

By OFX

Headlines again dominated the spotlight as investors fled to safety over escalating trade war concerns. The past 24 hours have been exceptionally volatile for global FX markets as Traders attempt to work out a strategy in a changing landscape. Ultimately though, the USD strengthened against a basket of currencies, reaching 95.01 on the DXY.

President Trump was again the catalyst for volatility in overnight trading, announcing overnight that he was considering 10% tariffs on $200b worth of Chinese imports. Still, the Chinese response was swift, releasing a statement saying that it intended to take ‘comprehensive quantitative and qualitative measures’ should the tariffs be implemented. Currently, China imports approximately $130b worth of goods and cannot match the duties directly. Analysts suggest they could achieve their counter in a variety of ways to adjust for this, including increased regulatory scrutiny.

Investors across the globe took the news poorly with a flight to safe-haven currencies and assets. The S&P dropped 0.5% straight away, and the Shanghai Composite lost 4%. US 10-year treasury yields fell to 2.85% from 2.92% and the Japanese Yen (safe-haven currency) appreciated by 1%. The market now turns its attention to further headline and more central bank speeches with the RBA, ECB, BOJ and the FED releasing statements today.

The loonie continued to trade on its back foot, losing 0.6% versus the USD with USDCAD trading all the way up to a new year high at 1.3286.

The 1.3240 level on the USDCAD acted as resistance during the start of the European session, but the CAD was impacted negatively with further trade concerns, not only from the US-China drama but also from Trump declarations around NAFTA, saying Canada treats the US “horribly” from a tariff perspective.

Uncertainty around OPEC following output debate put some downward pressure on oil, which also weighed negatively on the loonie. Next levels to watch for the USDCAD are the 1.3345 area on the upside, and we’ll have to see if now 1.3240 acts as support.

The euro lost more than 100 points vs. the US dollar yesterday as risk sentiment waned and investors sought out safe-haven assets. ECB President Draghi spoke at the ECB forum but said little to influence the single currency positively. He took a neutral stance on monetary policy when delivering opening comments for the meeting of central bankers in Portugal, saying that the ECB would be patient when it came to determining when to hike interest rates and that confidence in the path of inflation is rising.

Mario Draghi is due to speak again today and may have more of an impact this time around. The data docket is looking pretty light, so unless Draghi and company say something surprising, then the euro is likely to remain subdued through most of today’s session.

“Risk off” was the theme for most of the morning yesterday in London as the US/China trade war of words reared its ugly head again. The USD strengthened, and GBP/USD slipped under the 1.3200 figure to a new calendar year low. The Brexit headlines didn’t help the pound’s cause either, this after the House of Lords defeated the government on giving MPs a “meaningful vote” on any outcome from negotiations on Monday. The Commons is set to vote on whether they agree with the House of Lords today, the result of which could be very tight.

Investors will also be trading with an air of caution ahead of tomorrow’s Bank of England monetary policy meeting. There’s less fuss over this announcement, compared to last, with the central bank unlikely to change its stance too significantly and almost certainly likely to leave interest rates on hold. There’s no top tie economic data due for release from the UK today.

The Australian dollar plunged through key technical supports on Tuesday marking new 13 month lows at 0.7345 as changes in RBA commentary and broader trade concerns weighed on the currency. Having broken below the 0.7430 and 0.7400 U.S cents the AUD suffered a rapid sell-off as risk sentiment all but evaporated from the market following threats from U.S President Donald Trump wherein additional tariffs would be imposed on Chinese exports.

The comments sufficed to fuel and reignite concerns surrounding broader trade tensions between the world’s two largest economies heightening fears an all-out trade war could damage global growth. When coupled with a change in language issued within the RBA’s monthly minutes: where the board removed assertions the next interest rate adjustment would be up, and investors all but rushed to rid AUD holdings. The shift in RBA rhetoric suggests the RBA may be adjusting its stance to prepare markets for a possible rate cut and only highlights the burgeoning gap between central bank interest rate policies.

Opening this morning at 0.7374 attentions remain firmly fixed on ongoing trade disputes as risk sentiment drives direction. A weekly close below 0.7400 could suggest support has become resistance and the AUD is entering a new short-medium term trading handle between 0.7200 and 0.7400.

The New Zealand dollar opened yesterday at 0.6935 and traded sideways before an afternoon sell-off ensured. A bout of risk aversion came into play during the Asian session as trade tensions between the United States, and China continues to play out.

The latest Global Dairy Trade auction did no favors for the kiwi as markets saw the index fell to negative 1.2% and the second consecutive fall for the month. Westpac consumer sentiment for the month was down 2.6 points for June with a reading of 108.6 as consumer confidence waned with household’s ability to save remains low.

Eventual lows at the close of play hovered around the US 69 cent handle, and overnight lows were seen at 0.6885. Movements this morning will be dependent on the release of this morning's current account figures for the quarter with the New Zealand Dollar opening this morning at 0.6872.