Risk Aversion Prevails as Trump Threatens China with More Tariffs
The US dollar traded mixed against the other G10 currencies on Monday. It gained against AUD, CAD and SEK in that order, while it underperformed versus JPY, CHF, NOK and EUR. The greenback ended the day virtually unchanged against GBP and NZD.
Investors abandoned the commodity-linked currencies and sought shelter to safe havens following overnight reports that US President Donald Trump asked his US Trade Representative Robert Lighthizer to identify USD 200bn in Chinese goods for additional tariffs at a rate of 10%. Asian stock markets tumbled on the reports, alongside other global equity futures, pointing to a rough opening in Europe and the US.
The threat came after Beijing’s decision to respond to the tariffs announced by the US on Friday. On Friday, the US administration decided to impose 25% tariffs on USD 50bn worth of Chinese goods, with Beijing retaliating by imposing tariffs at the same rate and on the same amount of US products. Both nations said that tariffs on USD34bn worth of goods will be enacted on the 6th of July, while the rest will be subject to further review.
Following the new threat, China’s commerce ministry said that the nation will fight back with “qualitative” and “quantitative” measures if the US publishes an additional list of tariffs. With the ball now back to China’s court, the question is how Beijing will respond in case Trump’s new threat takes flesh.
After the US decision on Friday and Beijing’s retaliation, the markets remained somewhat indifferent, as this round of tariffs was proposed back in April and was more or less expected. However, the new threat on USD 200bn of Chinese imports was not on investors’ agenda and thus, it heightens fears over a more intensified dispute between the two nations.
As we noted in the past, one of our favorite proxies for playing the “Trade war” theme is AUD/JPY. With the RBA set to stand pat until next year, the Aussie is likely to stay sensitive to further headlines on the matter, mainly due to Australia’s heavy trade exposure to China. Further tit-for-tat tariffs and threats are likely to keep the currency under selling pressure. On the other side of the equation, due to its safe-haven status, the yen gets benefited in case of uncertainty and market fears. Indeed, among pairs consisting of two G10 currencies, AUD/JPY was the biggest loser overnight.
AUD/JPY – Technical Outlook
Tensions between US and China over tariffs are in full swing and AUD/JPY is feeling the heat of it. The pair had been trading within a rising channel from around the 23rd of March. Now we are seeing a break through the lower bound of that channel, which means that the bears are sitting comfortably in the driver’s seat and trying to take the pair lower. Certainly, the day has just started, and we have a long way to go before the close. There still could be a possibility for AUD/JPY to move back inside the channel today.
For now, judging by the current picture, we will remain somewhat bearish and target lower levels. If AUD/JPY continues to slide lower and breaks below the 80.75 area, then the pair could continue sliding towards the 80.50 zone, marked by the lowest point in March. Of course, we could see a bit of retracement back up to the 81.00 level, which lies near the lowest point in May, and then a reversal to the downside again, towards the previously mentioned levels.
Alternatively, if the pair rebounds and makes a comeback into the channel, this could mean that the bulls are not willing to let go of the pair that easily. A good move back up and a close of today’s daily candle above the 81.30 level could bring hope to AUD/JPY buyers. The bulls could be interested in driving the pair back to the 81.90 zone, a break of which opens the path towards the 82.35 mark.
OPEC Members are Considering a Compromise Deal at this Week’s Meeting
Yesterday, oil prices traded higher following reports that OPEC members are considering a compromise deal at this week’s meeting in Vienna. While Iran is among the nations opposing any raising-output decision, a number of other countries are optimistic that they could agree on a production increase of 300-600k bpd. This came as a relief for oil prices, as this number is well below the previously rumored amounts of 1mn and 1.5mn bpd.
However, nothing is written in stone yet. Heading into the gathering, and ahead of the final decision, we expect oil to stay sensitive to any headlines and comments on how much OPEC and other major non-OPEC members – known as the OPEC+ group – are considering to return into the market.
At its latest gathering in November, the group agreed to extend the production cuts until the end of 2018, but headlines in late May suggested that Saudi Arabia and Russia are in favor of loosening the cuts now, which prompted investors to abandon the black liquid. Thus, given that the market has already priced in the probability for such a decision, if this is the case, we expect the reaction on the final deal to depend on the actual number agreed. With what we know up until now, that amount ranges between 300k and 1.5bn bpd. So, anything near the upper bound or above could prove negative for oil prices, while anything near the lower end or below could prove supportive.
Now, in case the majority decides to stand pat and stick to the November accord, oil prices could skyrocket, but it will be interesting to see whether Saudi Arabia and Russia will proceed with increasing their output without wider backing.
Brent Oil – Technical Outlook
All eyes are on the OPEC and other oil producing countries meeting in the end of this week in Vienna. Brent continues to print lower peaks and lower troughs below the short-term downside resistance line, drawn from the highest point in May at around 80.50 mark, but it also trades above the long-term upwards moving trendline, drawn from the 21st of June. Thus, even if we see the price turning down again in the near term, we remain flat with regards to the bigger outlook, especially with the final outcome of the Vienna meeting still looming.
Until the aforementioned resistance line is broken, we remain sceptical about the upside potential. If Brent moves below the 73.70 level, we could start aiming for the 72.20 area, marked by yesterday’s lows. If that area gets broken again, then the “black gold” could make its way towards the previously mentioned upwards moving trendline for a quick test. This is where the price could stall for a while, waiting until investors decide on the future direction for the commodity.
On the other hand, if the aforementioned break of the resistance line happens, then this could interest more bulls to jump into the action and drive Brent oil towards the 76.70 level, a break of which could lead the commodity towards the 79.10 mark, or even back to the May highs at around 80.50 zone.
As for Today’s Events
During the European day, we get Eurozone’s current account balance for April, while later in the day, the US building permits and housing starts, both for May, are due to be released.
Tonight, during the Asian morning Wednesday, we get the BoJ meeting minutes. However, these are the minutes from the April meeting and not the latest one. Thus, we don’t expect any major market reaction resulting from this release, as the market may treat it as outdated. From New Zealand, we get the current account balance for Q1.
As for the speakers, we have two on the agenda: ECB President Mario Draghi and ECB Chief Economist Peter Praet will both speak at the “ECB Forum on Central Banking” in Sintra.
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