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The trade war rhetoric continues

By OFX

The US Dollar fell against both the Yen and Euro during last weeks opening sessions as global equities tumbled, weighed down by increasing trade tensions that are now spreading beyond China to other key strategic partners. Trump announced at the end of the previous week 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.

In other news last week, the People’s Bank of China devalued the Chinese Yuan, again. The reference rate was set at its highest level since December and has only added fuel to the trade war fire. This event looks configured to support increased dollar bids, at least in the run-up to the end of the week. With month end, quarter end, and half year approaching we’re also likely to see some portfolio rebalancing and “squaring up” of books and currency positions – it could make for some heightened volatility over the coming sessions.

The CAD was not able to capitalize on last weeks broad USD weakness as trade tensions escalate and risk-off sentiment dominates markets. The loonie lost around 0.20% versus the greenback in the opening sessions, 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 as of late hasn't been receiving any help from oil prices as well, which were not able to continue in the bullish path started last 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.

The end of the week saw the Canadian dollar gap lower vs. the dollar as Bank of Canada Governor Poloz spoke. He didn’t give too much away and was very coy on the potential for a rate hike in July. He said, “I read the odds of an interest rate hike the same way I think you do by looking to see what’s going on in the market.” The probability of a rate hike at the July meeting fell to 52% from 61% before the comments. Markets perhaps are yet to digest what he had to say entirely.

With the ongoing trade war rhetoric, the EUR/USD cross like most other currencies vs. the dollar has fallen over recent sessions. With investors focused firmly on last weeks EU Summit, the pair look set to break down through the 1.15 level at one point but recovered, perhaps in reaction to Angela Merkel’s comments at the beginning of the Summit, where she focused on immigration stating that Europe’s fate may be determined by the issue of migration. EU Leaders have agreed on an immigration deal whereby EU countries would set up migrant centres on a voluntary basis and restrict movement of asylum seekers between EU states. This stance has helped support the improvement in risk appetite and has ultimately weighed on the dollar.

German coalition talks begin this weekend which could give us some clues as to Chancellor Merkel’s chances of staying. All eyes will be on Monday's opening sessions as the markets digest any speculation.

Last weeks trade war rhetoric received quite a bit of attention from investors and traders in the European sessions, 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. Midweek, BoE Governor Mark Carney, commenting on the central bank's Financial Stability Report, didn’t really touch on monetary policy, he instead spoke about how global risks had increased and how the banks’ capital had risen in order to withstand any negative Brexit related impacts to the economy.

Risk sentiment has improved too after EU leaders reached a deal on the issue of migration and major currencies including the GBP and EUR have bounced back vs. the dollar as a result. Brexit headlines are continuing to keep a lid on cable though and it has struggled to make any form of convincing break back above 1.31. We could be in for some volatility derived from month end/quarter end/half year end currency rebalancing too.

The Australian dollar opened last week struggling through trade, as a lack of any meaningful data hindered any chance of movements higher.

Early sessions touched lows near 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%. Oil fared no better falling 2% as OPEC approved to increase oil production from 700,000 barrels to a million barrels a day from July 1. Brent crude fell below $74 a barrel pulling the Australian dollar with it.

As global risk sentiment continues to sour, the Aussie dollar is struggling to keep pace with the safe haven USD. The Aussie has fallen to an 18month low and is expected to remain under pressure as the yield differential continues to move in favor of the USD.

As of late, the New Zealand Dollar has been one of the worst performers amongst it’s G10 counterparts with the bulk of the damage done during last weeks Wednesday session. The fall in the Kiwi is seemingly a biproduct of weakening global risk sentiment and a weaker than expected business survey which showed confidence activity indicators slipping lower and the underperforming currency has touched its lowest level since June 2016.

In what was of no surprise to markets, the RBNZ opted to keep it’s cash rate on hold at 1.75% however there were some slightly more dovish tones emanating from the subsequent statement. RBNZ governor Orr reinforced that the direction of the next rate move was still uncertain, essentially doubling down on May's message that Kiwi interest rates will remain at record lows for "some time to come” and that the governments fiscal spending plans were lower and later than anticipated. This obviously only leads to further speculation that the next move in official interest rates from the RBNZ may be lower, not higher.