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UK politics see some tumultuous shifts, NATO and more tariffs

By OFX

Attentions were again dominated by news on the on-going trade war last week, which had an unexpected turn come midweek. China didn’t immediately respond to the news of the extra $200b tariff that President Trump touted. Instead, the market enjoyed headlines suggesting that China and the US would resume trade talks. The effect on markets was almost immediate with capital flowing back into risk assets and commodity currencies enjoying the positive flow. US CPI Inflation data was also released during the midweek American trading session which came in unexpectedly lower at 0.1% for June. Nevertheless, the broader narrative points to a healthy economy with Inflation on an annual basis rising to 2.9%, the fastest growth since early 2012.

It appears markets see the action by the Trump administration as being more detrimental to China than America at present given the solid growth, employment and inflation figures the US is seeing of late.

The week also saw some Nato headlines and Trump's stance on defense spending. Trump has previously taken issue with other members of Nato for not increasing defense spending towards meeting a 2% of GDP target by 2024 and was adamant on pushing the issue. Concluding talks with fellow leaders of the 29-nation trans-Atlantic alliance, Trump reaffirmed support for NATO, but not without the hint that the United States could go its own way, if ally nations could not commit to additional military spending.

Last week saw soft commodities and risk aversion keep the Loonie defensive. Data coming from Canada was mixed, payrolls beat estimates but mainly driven by part-time workers, while hourly earnings rose less than expected (+3.5% vs. 3.7% expected) and the Unemployment rate increased to 6% (versus 5.8% expected).

Also, Canada’s trade deficit increased more than expected in May, showing the impact the tariffs game might be having in trade. Still, probabilities for a rate hike from the Bank of Canada this week spiked again, reaching 86%, the highest level since February.

On Thursday, and as expected, the Bank of Canada raised overnight rates 25bps and now at 1.5%, which is a ten year high. The press conference was constructive and the central bank kept the option open for further tightening in the future. At this time, the market is pricing in a 68% chance for an October rate hike before year-end. Statements from the BoC also highlighted the decreased concerns about housing and trade and revised its shorter growth forecasts. Policymakers noted that the economy is operating close to capacity.

Mario Draghi gave an upbeat testimony on the state of Eurozone economic health last week, stating that inflation was on a self-sustaining path and that the banks QE programme would add around 1.9% to GDP between 2016 and 2020. Despite this upbeat assessment EUR/USD failed to break through 1.18 retreating to around 1.1740 as a relatively well-bid greenback appreciated across the board.

Elsewhere, The latest German ZEW Economic Sentiment survey result was released registering its fifth fall in six releases. The -24.7 reading is the worst since August 2012 and ZEW President, Professor Achim Wambach, commented: “The current survey period has been marked by great political uncertainty. In particular, fears over an escalation of the international trade war with the United States have dampened the economic outlook. The positive news regarding industrial production, incoming orders and the labour market have been greatly overshadowed by the anticipated negative effects on foreign trade”.

Towards the end of the week, we saw the release of the much anticipated ECB Monetary Policy Meeting Accounts, however, there was little new information to take away. Traders are now trying to get a firmer idea of when the ECB may raise rates from their negative level and the publication just re-iterated that they will remain on hold “through the summer of 2019.” With a quiet end to the week, Trump/trade will be the main drivers of this weeks opening sessions.

Last week saw some tumultuous UK politics, as two key members of Prime Minister, Theresa May's cabinet resigned over the government's intended Brexit strategy, hammered out at Chequers on Friday.

First to go was Brexit Secretary, David Davis who’s exit was announced on Sunday night. Davis’ letter of resignation highlighted that “the general direction of policy will leave us in at best a weak negotiating position, and possibly an inescapable one.” Replacing Davis will be Dominic Raab who has been promoted from housing minister. Next to go and the one that really rattled the pound was the departure of Foreign Secretary, Boris Johnson. Rumours started to circulate at lunchtime that he may be leaving and around 3pm it was confirmed he had quit. Following the news, the GBP/USD pair had lost 150 pips, bottoming out at 1.32 as markets weighed up the chances he would make a bid for power throwing the Tory party into turmoil. Johnsons resignation letter, stated that the “Brexit dream is dying, suffocated by needless self-doubt.” In a barbed response by May of Johnsons resignation, she said, “I am sorry - and a little surprised - to receive it after the productive discussions we had at Chequers on Friday.” Health Secretary, Jeremy Hunt has been drafted in as replacement for Johnson as Foreign Secretary.

The GBP/USD cross closed the week under the 1.32 mark as Donald Trump weighed into the Brexit debate adding downward pressure to an already fragile pound. In an interview with The Sun newspaper, Donald Trump undermined UK Prime Minister, Theresa May's Brexit plan by saying “If they do a deal like that, we would be dealing with the European Union instead of dealing with the U.K., so it will probably kill the deal.” He also commented that ex-Foreign Secretary, Boris Johnson, who resigned over the proposed plan would make a “great prime minister.”

The comments from the leader of a country many consider to be our closest ally will add to the argument of those who consider Theresa May a lame-duck PM with change at the top needed.

It was a relatively quiet docket for the Australian Dollar last week, with no major releases, barring the NAB's business confidence and conditions indexes released on Tuesday, which fell in June to 6 from a downwardly revised 7, missing expectations of 8.

Domestic business conditions hit record highs earlier this year, although Australian business conditions for May showed sharp declines (falling six points to +15) in NSW and Victoria. For this release, Business Conditions remained unchanged at 15, below the market's forecast of 18. The soft print had a muted impact on AUD value as broader direction continued to be dominated by the escalating trade war and its subsequent impact on markets appetite for risk.

Midweek saw the United States decide to impose more tariffs on an extra $US200 billion ($AUD270 billion) worth of imports from China, adding fuel to the trade war fire and as a result the Aussie dollar fell to an overnight low of 0.7360, down almost 1 per cent since early June when worries of a trade war began.

No doubt, the coming day's markets will again be focusing on any further developments between the US and China.

The NZD/AUD cross began last week within a very tight range moving between 0.6828 and 0.6859. With Gold prices trading higher along with Silver, Copper and Aluminium, all have assisted commodity-sensitive currencies such as the Kiwi, but as with its antipodean cousin, most gains have been short-lived.

As of late, the Kiwi and Aussie have both demonstrated that they are typically the most sensitive G10 currencies to global trade wars. On the back of the latest U.S announcement of plans to impose taxes on an additional US$200 billion of Chinese goods, we've seen the NZD steadily decline through Asian, European and US trading sessions.

In case you missed it, the US administration has released a 195-page list of Chinese imports that will be hit with a 10% tariff. The tariffs could take effect from as early as September. It follows from the 25% tariffs on US$34 billion worth of Chinese imports into the US that took effect at midnight on the previous weeks' Friday.

As with most markets, risk aversion has kicked into gear with trade concerns firmly back to the centre of the market radar.