Did someone say Trade War?

This week will be a fairly quiet week in terms of Economic Releases except for one or two important ones.
Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn

In this week’s article:

  • What events moved currencies last week?
  • Events to look out for this week
  • Our recommendations for the week ahead

This week will be a fairly quiet week in terms of Economic Releases except for one or two important ones.

Luckily there are possible opportunities for grabbing some pips which we discuss below.

We expect trade war and political headlines to remain some of the main drivers in the markets this week.

United States

What happened last week?

Last week markets saw some positive developments with the US-China trade war.

According to Reuters, the US has invited Chinese officials to restart trade talks.

The market’s initial reaction to this news was very positive.

Especially after Chinese officials welcomed the proposal to restart trade negotiations.

The positive sentiment was later soured by President Trump who said the US was not pressured to make a deal.

On Friday Trump instructed aides to proceed with $200 billion more in tariffs on China.

Timing of the tariffs are unclear so we need to keep the Squawk on for any developments.

So why is this such a big deal?

In 2017 the total exports from China to the US was over $500 billion dollars.

Thus, with the previous $60 billion and the added $200 billion the US has tariffed half of China’s imports.

The week ahead

The week is light in terms of US economic data releases.

The only releases of note is the flash PMI’s for Manufacturing and Services on Friday.

According to Danske Bank the PMI’s can provide insight on current US growth momentum.

The Flash Manufacturing PMI is expected to come in solid at 55.0 versus a prior reading of 54.7.

The Flash Services PMI is also expected at 55.0 from a prior reading of 54.8.

Trade Ideas

The US economy has been firing on all cylinders.

The Federal Reserve is also widely expected to raise interest rates twice more in 2018.

Fundamentally the bias for the US dollar remains bullish.

The US dollar has also received a lot of safe haven flows from the ongoing trade war concerns.

In the week ahead look out for confirmation of the $200 billion in tariffs and for retaliation from China.

Both of these two scenarios could provide further buying opportunities for the USD.

Australia

What happened last week?

Australia is very exposed to China as over 30% of Australia’s exports are sent to China.

Thus, any slowdown in the Chinese economy will negatively affect the Australian Dollar.

The ongoing trade spat between the US and China has weighed on the Australian Dollar.

The trade war is not the only reason for the market’s negative sentiment on the AUD.

Market expectations for the RBA is to raise interest rates in Q4 2019.

Some analysts even says 2020 is more realistic.

Due to the early week positive trade war developments the AUD saw a decent rally.

Friday’s comments of the $200 billion tariffs on China going forward saw the AUD pressured.

The week ahead

On Tuesday we will see the minutes of the most recent RBA monetary policy meeting.

As usual we don’t expect any fireworks from the minutes.

The RBA left their rates unchanged at 1.50% at its latest policy meeting, and the statement was upbeat.

The RBA was not at all concerned about Westpac raising their mortgage rate in August.

According to Bloomberg the mortgage rate increases pushes back RBA interest rate expectations.

Higher mortgages means consumers have less money in their pockets.

Less consumer spending means lower inflation and dampened growth.

Trade Ideas

Any further escalation or de-escalation in the Trade war will affect the AUD.

So, in the week ahead keep the Squawk on to take advantage of any positive or negative trade developments.

Also, markets will keep an eye out for any comments from the RBA about mortgage rate increases.

Any more detailed comments in the minutes regarding this can move the markets.

Any rallies in the AUD will probably be faded due to the ongoing trade concerns so keep that in mind.

Canada

What happened last week?

NAFTA negotiations between US and Canadian officials also continued last week.

There are still a few sticking points between the US and Canada.

One of the main sticking points has been Dairy with the US demanding more access to Canada’s dairy market.

A breakthrough occurred when it was reported that Canada was willing to give the US dairy access.

The Canadian dollar has remained supported after the breakthrough.

As of Friday no deal has been confirmed yet, but negotiations will resume on Monday.

The week ahead

This week will be important as any positive or negative NAFTA headlines can move the markets.

Another very important release for the CAD is Friday’s CPI release.

Previous CPI YY release on 17 August smashed market expectations coming in at 3.0% versus 2.5% expected.

The BOC expects that CPI have peaked at 3.0% and will gradually move down towards 2.0% in early 2019.

Inflation of 3.0% is very positive considering that the BOC has an inflation target of 2.0%.

The market expects CPI YY to slow to 2.9% and CPI MM to slow to 0.1%.

It is also very important to note that the BOC’s preferred CPI readings are the CPI Trim, CPI Median and CPI Common.

All three of these measures came in just above, below or on the 2.0% target.

This should be very positive for the BOC and keep them on their hiking path.

Trade Ideas

Make sure to keep the news Squawk on to take advantage of any headlines about NAFTA in the week ahead.

A strong release or beat on CPI should solidify the market’s expectation of an October rate hike.

Thus, a good release could be a potentially good buying opportunity.

Keep in mind a positive CPI release will be dwarfed if there are negative NAFTA developments.

United Kingdom

What happened last week?

This week saw some interesting developments in the Brexit saga.

Various positive and negative Brexit headlines saw the Pound whipsaw last week.

The week started off positive with comments from the EU chief negotiator.

Michel Barnier said it was realistic to achieve a Brexit deal in six to eight weeks.

Sentiment soured again as BOE Governor Carney spoke up about possible no-deal implications.

According to Carney a disorderly Brexit could entail a significant financial shock.

Another stress point for the pound is possible political instability.

PM May is facing opposition from all sides about her Chequers Brexit plan.

Rhetoric about a challenge to PM May’s leadership is growing by the week and could weigh on the pound.

The week ahead

According to Danske Bank focus will remain on Brexit.

Especially on Wednesday and Thursday during the informal EU summit in Austria.

ING believes that a sustainable recovery in the pound is likely.

They also point out it will only happen on more concrete positive Brexit progress.

In terms of economic data, on Wednesday we will see the CPI figures for August.

Expectations are for CPI YY to soften to 2.4% from 2.5%.
Similarly, Core CPI YY is expected to soften to 1.8% from 1.9%.

Thursday we also have Retail Sales.

The market expects Retails sales to come in a lot softer compared to prior.

Retail Sales YY is expected to slow to 2.3% from 3.5% and Retail Sales MM to slow from 0.7% to a soft -0.2%.

Trade Ideas

The way to trade big misses or beats on these economic data releases will be dependent on Brexit.

All the focus is on Brexit, so any big deviations in the data should be traded in line with Brexit sentiment.

Keep the news squawk on for any Brexit headlines as they are sure to move the markets.

New Zealand

What happened last week?

The NZD appreciated with the AUD during the positive trade war comments early last week.

However, positive trade war developments will not be enough the help the NZD at the moment.

It has been a tough ride for the New Zealand dollar over the past couple of months.

The recent Monetary Policy statement and rhetoric from the RBNZ has been very dovish.

Rate hike expectations from the RBNZ has been pushed out to late 2020.

Chances of the next interest rate move from the RBNZ being a cut has increased recently.

The main reasons for the RBNZ’s concerns is due to lagging business confidence and growth.

If growth and business confidence continue to slow the RBNZ will need to cut their interest rate.

The week ahead

As growth is a high priority the NZD GDP on Thursday will be one of the highlights of the week.

If GDP has a miss on Thursday that could provide a great shorting opportunity on the NZD.

The market expects GDP YY to slow from 2.7% to 2.5% in Q2 and GDP MM to climb from 0.5% to 0.7%.

Even a good print on GDP for Q2 might not convince the market that a rate cut is off the table.

ANZ believes that the lagging business confidence which hit a ten year low in August is a big concern.

Westpac is expecting GDP for Q2 to come in much higher than expected 0.9%.

However, they also explain that a beat would not sway the current negative sentiment on the NZD.

Westpac’s Consumer Sentiment on Tuesday is another thing to look out for this week.

Consumer confidence slowed in June to below its long-run average.

Thus, another miss on Tuesday could provide a shorting opportunity on the NZD.

Trade Ideas

In our opinion the best opportunity on the NZD would be a surprise miss on Q2 GDP.

If this happens a short on NZD would be a good play.

If NZD GDP is a beat, a short term relief rally trade might be an option.

However, the fundamental bias for NZD is bearish so key here is short term.

Also keep in mind the NZD is considered as a commodity currency so any trade war developments can affect it.

Japan

What happened last week?

The week was fairly quiet for the JPY. The Yen is considered as a safe haven currency.

This means markets flock to the Yen in times of risk.

Thus, the positive trade war developments saw JPY pressured.

With the surprise interest rate hike from Turkey, Emerging markets saw some relief.

This added further pressure on the JPY as the market saw safe haven outflows.

However, Friday saw the markets run to safe haven flows once more as tariffs are set to continue.

The week ahead

The BOJ will meet this week on Wednesday.

Markets are expecting the BOJ to keep interest rates unchanged at -0.10%

Most of the focus will be on the Monetary Policy statement.

In their July meeting the BOJ slightly increased the upper limit for the ten 10 JGB Yield.

This was seen by some market participants as a form of stealth tapering by the BOJ.

No fireworks are expected from the meeting as inflation is still miles away from target.

According to Danske bank the bigger focus for this week will be on the LDP leadership vote on Thursday.

It is expected the current PM Abe will have victory in the vote.

A win for Abe could provide some strength for the JPY as political instability fades.

Another thing to keep in mind for the JPY is possible safe haven flows due to trade war developments.

Trade Ideas

Stay close to the news squawk this week as any change in risk can dramatically impact the JPY.

Keep this in mind if you are planning any JPY trades.

Switzerland

What happened last week?

With all of the turmoil in emerging markets the CHF has remained supported for some time.

After an impressive run the CHF ran into some offers last week.

Some thought the sudden weakness in CHF was due to SNB intervention.

Switzerland sends 45% of its exports to the EU.

Thus, they are very dependent on the EURCHF exchange rate.

For this reason the SNB is known to intervene in currency markets to keep CHF appreciation at bay.

Watch out in the news for possible SNB intervention.

The week ahead

On Thursday the SNB will have their quarterly monetary policy meeting.

It is widely expected for the SNB to keep the Libor rate unchanged at -0.75%.

The market expects the SNB to stand down on rates until the ECB makes their first move.

Thus the current expectation is for the SNB to hike somewhere in Q4 2019.

For this reason, the monetary policy meeting are expected to have a muted reaction in the markets.

ING thinks the CHF should stay relatively supported in coming weeks.

The reasons for this is continued concern over Italy’s economic conditions.

Trade Ideas

Along with the JPY, the CHF is also considered as a safe haven.

Thus, any change in perceived risk can dramatically impact the CHF.

Keep the news squawk on and take advantage of any drastic changes in risk sentiment.

In the week ahead look out for any further comments about Emerging Markets or trade wars to move the CHF.

Euro Zone

What happened last week?

Last week saw the Euro gain some decent support.

Surprise monetary policy moves from Turkey and Russia provided support for the Euro.

The ECB meeting held on 13 September provided a rather muted market reaction as expected.

Recent positive Brexit developments also provided some support for the Euro.

On Friday Reuters reported that some ECB members felt risks in the EU economy were tilted down.

This might be important in the week ahead.

The week ahead

The week ahead will be fairly light for the Euro in terms of economic data releases.

Friday will see the Euro flash PMI releases for Services and Manufacturing.

The Flash Manufacturing PMI is expected to drift lower to 54.4 from 54.6.

Flash Services PMI is expected to stay flat at 54.4.

After starting the year off on a declining trend the PMI reports are important to gauge the EU economy.

Trade Ideas

We can expect any further challenges for Turkey and Italy to pose a risk on the EU.

For this reason, keep an eye out for any negative or positive news regarding Italy or Turkey.

The Euro has been pressured by trade war escalations.

So, also keep in mind that any dollar appreciation due to the trade war can affect the Euro.

Wrap up

Any trade war developments will probably be the market’s main focus.

In terms of economic data the most important ones will be NZD Q2 GDP and CAD CPI.

Also remember to keep the news squawk on to take advantage of any Brexit or NAFTA related headlines.

Please leave a comment below with any questions about this week’s trading opportunities.

Comments

comments