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Risk off as Trade Tensions Escalate

By OFX

The US Dollar fell against both the Yen and Euro on Monday as global equities tumbled, weighed down by increasing trade tensions that are now spreading beyond China to other key strategic partners. Trump announced Friday a 20% tariff would be imposed on cars imported from the EU and doubled down on Monday implementing plans with the US Treasury Department to block firms with a 25% foreign investment from buying U.S companies. The announcement is a bid to protect US technology and while it “will apply to all countries” at this point appears to target specifically Chinese investment. The draft legislation has only intensified hostilities between the world’s two largest economies and further dampened investors’ appetite for risk.

The Euro moved through 1.17 to touch 1.1715, and the Yen opens below 110 buying 109.72, while the risk off environment saw emerging market currencies suffer their worst weekly open in almost two years. Trade tensions and the increasing cost of US debt as monetary policy continues to tighten have reduced the attractiveness of emerging market currencies with the MSCI index down half a percent through early trade.

Attentions now turn to US consumer confidence as a key marker guiding broader economic health while trade and risk appetite remain the primary drivers governing broader direction through trade on Tuesday.

The CAD was not able to capitalize on the broad USD weakness as trade tensions escalate and risk-off sentiment dominates markets. The loonie lost around 0.20% versus the greenback as USDCAD increased around 0.20% to finish Monday’s US session at 1.3297, the same level where it opened in the Asian session.

The loonie did not get any help from oil prices, which were not able to continue in the bullish path started on Friday. OPEC members made clearer that the 1MM barrel production increase was coming in full, despite not all members having same spare capacity and rules within OPEC members stating that the share of the market between members should not be impacted.

From a technical perspective, next levels to watch for the USDCAD are 1.3382 (June 22 high) and 1.3262 (June 22 low)

EUR/USD hasn’t been able to hold on to the 1.17 handle this morning though, as the dollar attracts bids in the early London session. There’s nothing in particular that that has caused the move – there’s no data to go on.

Apart from the escalating trade tensions, there isn’t that much for markets to go on for the day ahead either and traders in Europe may be lured outside by the great weather, fueling what are generally steady ranges at this moment in time.

The trade war rhetoric over the weekend received quite a bit of attention from investors and traders in the early European session yesterday amid a lack of any major economic data releases. Risk was sold off, apparent in the reaction in equity markets, and GBP/USD looked at one point it was heading for a break below 1.32. In the latest headlines on the subject, Trump has criticised Harley-Davidson over its plans to move production out of the US as a way to avoid EU tariffs.

Before the H-D story emerged a WSJ report that Trump was considering widespread restrictions on companies that are foreign-owned, or moreover that the US could prevent companies with at least 25% Chinese ownership from purchasing businesses that had “industrially significant technology.” US trade advisor Navarro then came out and said there were no plans for such restrictions and markets breathed a sigh of relief. Risk appetite improved mildly, and GBP/USD pushed back towards 1.33.

Cable opens close to this figure this morning, and while the data docket looks a little light again today, it’s likely that the trade rhetoric will continue to steer currency direction. That said, MPC members Haskel and McCafferty are speaking this morning, and their comments may still get some reaction.

The Australian dollar continued to struggle through trade on Monday as a lack of any meaningful data for release to start of the week hindered any chance of movements higher. The commodity-driven unit opened yesterday at 0.7440 before moving down to 0.7425 on lower liquidity in early morning trade. Overnight lows touched 0.7397 as the Aussie dollar was dragged down once again by ongoing trade tensions and a drop-in equity prices, most notably the Nasdaq falling more than 180 points and finishing 2.45% lower for the day.

Overnight lows touched 0.7397 as the Aussie dollar was dragged down once again by ongoing trade tensions and a drop-in equity prices, most notably the Nasdaq falling more than 180 points and finishing 2.45% lower for the day.

Despite the Australian dollar stabilizing above the US 74 cent handle, it was one of the worst performing currencies of the day and finished 0.4% lower. The AUD/USD opens this morning at 0.7405, and with a lack of any domestic data this week we expect trade tensions to be the primary factor in further direction this week.

The New Zealand dollar was slightly weaker this morning when valued against the US Dollar as trade tensions between the United States and China soared again overnight. The Dow Jones industrial average finished the session down as much as 446 points. The kiwi fell to an overnight low of 0.6883.

Looking ahead today and the macroeconomic calendar empty with no relevant data releases. All the focus again today will be on any more news on the trade front as well as this week's cash rate decision from New Zealand's central bank. From a technical perspective, the NZD/USD pair is currently trading at 0.6893. We continue to expect support to hold on moves approaching 0.6870 while now any upward push will likely meet resistance around 0.6940.