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Global Trade Tensions Continue to Soften Markets

By OFX

President Donald Trump was again the catalyst for volatility in the market, single-handedly forcing the US Dollar Index (DXY) lower. His comments and tweets were vast and varied in their targets, ranging from foreign rivals, allies, and even domestic institutions. Ultimately the DXY Dollar Index shed 0.7% to open this morning at 94.48, extending its’ losses to 1.25% lower than the year to date high of 95.65.

The barrage began initially with President Trump again accusing China and the EU of manipulating their currency and interest rates lower, further aggravating tenuous global relations. The Tweet continued to also include the independent Federal Reserve, with Trump highlighting their role in the stronger Greenback and noting “…the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge.” The market took the news poorly for the USD and immediately began to fall against its counterparts. Punters can clearly see that Trump prefers a lower US Dollar but the Federal Reserve is an independent body with their mandate and is unlikely to be swayed from their tightening plans. Nevertheless, the market entered another period of volatility. Closing out a busy Friday for the President was his comments to CNBC outlining his willingness to “go to 500”, in reference to the on-going trade war with China.

Attention this morning turns to existing home sales in the US released at 10 am. Later this week and the most significant economic data coming from the US on Friday with annualized GDP for Q2 expected at 4%.

Great close to the week for the loonie, trading back below 1.3150, more than 1% stronger versus the greenback to USDCAD 1.3130. 

It wasn’t only the broad USD weakness following Trump’s comments that helped the CAD but also the positive performance of commodities and Canadian yields. Retail sales came stronger for May at 2% (versus 1% expected) while CPI for June came at 2.5% (versus 2.3% expected), both supportive of higher interest rates and thus a stronger CAD. 

This week will bring wholesale trade sales, possibly a good indicator of how the trade war drama is affecting the sector. From a technical perspective, we’ll have to see if the loonie is able to break below 1.31 or if we will again start trading within the 1.31/1.32 range in the short-term.

As we near August we get closer to what is typically a quiet period for the Eurozone as traders and business’ take time off and head to the beach for a break. This week’s main event, which is likely to be a non-event, is the European Central Bank interest rate decision with little expected from ECB head, Mario Draghi. Last month we saw confirmation of the end of QE and it's unlikely we will hear any change in tone re: timing of future rate hikes.

Tomorrow morning sees the monthly PMI readings from around the bloc with little change in the main gauges predicted as a general slowdown in output permeates the EZ. GBP/EUR trades at 1.1210.

GBP/USD retook the 1.31 handle on Friday afternoon after looking in danger of breaking below 1.2950 a day earlier. Sterling has been under pressure of late as political concerns re: Brexit weigh on the currency with political in-fighting and high profile resignations in PM, Theresa May's cabinet. Some of these losses were reversed on Friday as US President, Donald Trump again rattled markets with a series of tweets over trade and currency. The one that weakened the dollar leading to sterling’s recovery stated: “China, the European Union, and others have been manipulating their currencies and interest rates lower, which the US is raising rates while the dollar gets stronger and stronger with each passing day – taking away our competitive edge. As usual, not a level playing field…” he went on “...The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?”

The tweets saw the dollar sold off across the board coming to sterling’s aid when it looked like cable could get stuck below the 1.30 handle. There is little data of note from the UK this week however next week’s schedule is packed, including what will likely see only the second interest rate hike from the Bank of England since the financial crisis. GBP/USD sits at 1.3145.

On Friday, the Australian Dollar suffered a massive sell-off during the Asian session sparked by the People Bank of China’s decision to devalue the Yuan by the most since 2016. The PBOC raised the yuan reference rate by 605 pips to 6.7671 - the most significant single-day jump in over two years, the AUD/USD lost 30 pips straight off the bat falling from 0.7350 down to 0.7318. The timing of the massive CNY devaluation indicates the world’s two biggest economies are likely moving towards a full-fledged currency war. Consequently, the AUD and Asian currencies have come under pressure.

The local unit recovered offshore as President Trump blamed China for manipulating their currency and again criticizing the Fed for raising rates. Treasury Secretary Steve Mnuchin tried to walk back Trump's criticism of Fed rate hikes and comments on currency manipulation, saying the president respects central bank independence and is not trying to interfere in FX markets. The AUD/USD gathered momentum and moved back towards the 74c handles closing Friday's session at 0.7403.

Look ahead; the Australian economic calendar is light until Wednesday where we see Q2 CPI.

Buoyed by broad-based USD weakness the New Zealand dollar was the day’s top performer Friday, jumping back through 0.68 U.S Cents. The Greenback dropped against major counterparts after President Trump doubled down on his disdain of the Federal Reserve and their current dogma of tightening monetary policy. The President took to Twitter to dispel his displeasure at China and the EU for deliberately manipulating currencies and interest rates while the Fed continues to hike baseline interest rates and place unfair upward pressure on the USD.

Rallying to touch intraday highs at 0.6810 the Kiwi found renewed support in stronger commodity prices however looks stretched approaching resistance at 0.6850. With speculative shorts still at records highs, the NZD remains vulnerable to correction and a move back below 0.67 as attentions turn to Wednesday’s Trade Balance print as the only big-ticket item on to docket moving into the week ahead.