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Trade tensions continue to dominate headlines

By OFX

Headlines last week again dominated the spotlight as investors fled to safety over escalating trade war concerns. The beginning of the week was exceptionally volatile for global FX markets, as Traders attempted to work out a strategy in a changing landscape.

President Trump was again the catalyst for volatility in trading, announcing last week 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%. Elsewhere, the USD did have some movement against some of the cross rates with the EUR and GBP being the clear performers. Changing hands at 1.3243, the Sterling enjoyed a 160-pip rally on the back of a hawkish monetary policy statement. Across the channel, the EUR also faired markedly better than it had been, recording a 100-pip rise against the Dollar before settling at 1.1655.

Trade protectionism and weakness in Emerging Markets have been putting pressure on commodities currencies like the CAD and the AUD. In the case of the CAD, uncertainty around potential OPEC production increases and rate differentials between US and CAD interest rates, have also been affecting its performance versus the USD.

Last week saw the Canadian dollar continue to slide against the US dollar with USD/CAD returning to levels not seen since June 2017. The demise of the loonie has primarily been driven by Trump’s trade wars as well as the week’s OPEC meeting uncertainty.

These fresh 12 month lows, have opened the door for a break below 0.75 U.S Cents. While moderating somewhat, the sell-off has persisted as trade tensions continue to plague broader market sentiments and risk aversion remains the primary directional driver. Concerns surrounding existing NAFTA policy and future trade relationships between the US and Canada are dampening demand for the loonie as investors look to shift remaining holdings and extend USD/CAD bullish bets. Having fallen more than 8% year to date and traders still holding a net short position since mid may there is scope for further USD gains and a move toward mid-2017 lows below 0.73.

Last week's focus for the single European currency was the risk of the German CDU/CSU coalition unraveling, which to some extent, 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. To begin the week, the euro largely played the same game as a host of other currencies as Trump’s tariffs saw investors flock to safe havens, including the USD.

With a reasonably light week on economic data, the EUR/USD cross managed to push gradually higher through the last few trading sessions of the week and came close to breaking through the 1.17 figure, mostly as a result of the weaker dollar.

To finish the week, the European flash services and manufacturing PMIs release saw the services element beat market expectations whereas the manufacturing printed weaker than forecasts. The mixed data didn't really affect the single currency, with the EUR/USD cross finishing above the 1.17 level.

After England won their opening match at a major championship for the first time since 2006 anything seemed possible last week, but some things in the FX market don’t change – notably another defeat for the government on the EU Withdrawal Bill. 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 meant that the bill was required to be sent back to the Commons on 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, for the most part, shrugged the latest Brexit developments off as investors waited keenly for the week's central bank announcement.

It came as no surprise that the central bank announced that it was keeping interest rates on hold at 0.5% but the MPC votes from the last meeting, released at the same time, were a surprise, showing that the bank’s chief economist Andy Haldane had joined two other committee members by voting for a rate hike. It gave the pound an immediate lift and GBP/USD popped higher by 80 points. To close the week, the Cable got a further lift as the US Philly Fed Manufacturing Index printed weaker than expected at 19.9 vs. forecasts for 29.0, the lowest reading since November. A US Supreme Court ruling also weighed on the greenback - the decision gave states the power to force online retailers to collect sales tax in states where they do not have a physical presence. GBP/USD pushed on through and convincingly up through the high 1.32s.

The Australian dollar plunged through key technical supports last week 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 worlds 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 wherein 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.

Despite a pullback in U.S Treasury yields and a broader USD correction the AUD remains vulnerable as long as tariffs and trade remain front and centre. Long considered a proxy for broader risk appetite and Chinese sentiment the AUD is being weighed down by the heightened trade tension between the US and China with upside gains very much dependent on risk demand. Attentions now turn to crucial US GDP number next week as the next big ticket macroeconomic driver with trade and political tensions continuing to govern broader flows. Having broken comfortably through 0.7430 and 0.74 a close below those handles this week consolidates the downward correction and could see support form as resistance moving into H2 2018.

The New Zealand dollar opened last week at 0.6935 hoping to cling onto support at the 69 US cent handle. The week's early movements were light with a lack of domestic data and a Chinese bank holiday observed.

Mid-week, the Kiwi dipped lower in offshore markets as the US dollar continued to gather momentum off higher interest rate yields and trade tensions and the NZD/USD cross tested 2018 lows seen in May 16th this year of 0.6850. Following this, the latest release of GDP figures saw a reading of 0.5% for the March Quarter, matching expectations and producing the slowest annual reading in four years of 2.7%.

At the close of the week, the Kiwi recovered after markets saw a reversal from the US Dollar from yearly highs following the release of weak Philly Fed manufacturing index figures and the NZD/USD cross bounced back to an intraday high of 0.6883.