Is The Market Getting Resilient To Trump’s Trade War?

In the week ahead, the market will be mainly focused on the upcoming rate decisions from the FED and RBNZ.  
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

Last week saw the markets in a better mood despite trade war escalations between the US and China. 

In the week ahead, the market will be mainly focused on the upcoming rate decisions from the FED and RBNZ.  

We will also get important GDP releases for the US, UK and Canada. Keep in mind that NAFTA, Brexit and Trade War developments will stay front of mind. 

United States  

What happened last week? 

The main event for the week came in the form of tariffs. Out of the blue corner the US followed through with their jab by adding levies on $200 billion of Chinese goods.  

Then out of the red corner China responded in kind by retaliating with $60 billion in tariffs on US products. 

However, markets took a buy the rumour sell the fact approach to the announcements. As a result, the dollar weakened as demand for riskier assets strengthened. 

The market’s very also unbothered by Trump’s threat to increase the levies from 10% to 25% if China does not play ball. 

The week ahead 

There is a very busy week ahead for the US in terms of economic data points. 

The most important release for the US will be Wednesday’s FED rate decision.  

From 2015, the Federal Reserve have been gradually tightening their interest rates.

The below chart shows the rate path the FED has taken after the global financial crisis. 

At the moment, the US economy is performing very well. Furthermore, the FED’s current dot plot suggest four hikes for 2018 and three more in 2019.  

According to Wells Fargo the probability of a rate rise at the Wednesday 26 September meeting is at 98%.

With a rate hike priced in the market’s focus will be on the FED’s policy statement and press conference. 

Scotiabank explains that the FED is late in its rate hike cycle. For this reason, tweaks to policy will become trickier for the FED. 

There has been a lot of talk about a possible recession in the US being as close as two years away.

According to the CME group, the FED might be a lot closer to neutral rate and to a recession then the market thinks. 

The market’s focus will probably be on the following three topics: 

The anticipated US yield curve inversion and how it will impact the FED’s rate path 

The FED’s neutral rate and future rate path projections 

Whether current trade war and tariff developments will affect growth and monetary policy. 

Key data points next week

On Thursday we will also see the release of Q2 Final GDP. The market is expecting GDP to remain at 4.2%. We don’t expect fireworks from this release, unless there is a big revision on the number. 

Friday will also have the release of the FED’s preferred PCE inflation measure.

Below is a chart which illustrates how close recent CPI numbers are to the FED’s 2% Inflation target. 

The dollar sold off after the recent release of Core CPI which missed expectations coming in at 2.2%. As a result, markets are expecting PCE to soften as well. 

On Tuesday we will see the release of the less important CB Consumer Confidence report. The previous release saw sentiment hit the highest levels in over 18 years. 

Wells Fargo attributes the solid labour market as the reason for consumer confidence.

The August labour report saw the Unemployment rate at 3.9% and the market expects this to slow to 3.8% in September. 

Why is consumer confidence important? 

Happy consumers are also happy spenders. 

One of the main drivers for stellar US GDP numbers has been consumer spending. So far consumers seem unfazed by Trump’s trade war. 

If consumers are confident their spending should continue to support growth. However, when confidence starts to show signs of cracks we need to pay attention. 

A big miss on confidence might reveal that worries about trade wars are starting to hit home. 

The market is expecting consumer confidence to slow to 131.3 from 133.4 on Tuesday. 

Trade Ideas 

Look for any possible upgrade or downgrade to the FED’s dot plot in terms of their future rate path. Any changes to this should have a big impact in the markets. 

Also, the dollar sold off after the miss on CPI. So, watch out for a beat or miss on Core PCE on Friday to take advantage of a move. 

Another possible trade could come from the GDP release. If we see a strong downward or upward revision from 4.2% it could provide a short-term trade opportunity. 

New Zealand 

What happened last week? 

As expected, the main event for last week was the release of the quarterly NZD GDP numbers. 

The GDP release came in much higher than the market was expecting. Consensus was for a print of 0.7%, but the release came in very hot at 0.1% for Q2. 

Furthermore, the big quarterly gain pushed up the YY number from to 2.8% versus market expectations of 2.5%. As a result, the NZD rallied off its recent lows. 

The NZD also received an extra boost from the improved risk tone in the market. 

The week ahead 

Wednesday should be a market moving day for the NZD with two very important releases. 

First up on the list is the NZD Business Outlook. Business confidence dropped to a 10 year low of -50.3 in August. 

The above chart shows the extent of the drop in Business Confidence. After the bad August number, the market will be keeping a close eye on this week’s release.  

According to BNZ investment bank, the Q2 GDP release came in high in spite of the low business confidence. So far, it does not seem like the lower trending business outlook is dampening growth. 

The other highlight for Wednesday will be the RBNZ rate decision. No changes to the rates are expected at this week’s meeting. 

The market’s main focus will be on the accompanying statement and press conference. As highlighted last week, the RBNZ has recently said chances of a rate cut has increased. 

Thus, the market will be very interested to see how last week’s beat on GDP changes the RBNZ’s rate path. BNZ explains that the GDP release should push back the possibility of rate cut. 

Trade Ideas 

Look out for the Business Outlook release. Another big miss on this could provide another short-term selling opportunity. 

The reason why we say short term is because the RBNZ rate decision is due a few hours after the business outlook.

The best opportunity will be a better business outlook to trade in line with the NZD’s rally last week. 

Keep in mind that the RBNZ rate decision can change any sentiment bias and will be the market’s main focus.

If the RBNZ is more upbeat after the recent GDP, we can expect the NZD rally to continue. 

However, if the RBNZ sticks to their dovish tone despite the beat on GDP we will expect the NZD to pair most of its gains.

If such a beat on GDP turns out not to be positive for the RBNZ, then there is not a lot that will be. 

Such a reaction would be in line with Westpac‘s view that there is a good chance the RBNZ will have a dovish stance. Expect pressure on the NZD if that should happen. 

Canada 

What happened last week? 

Most of the week was fairly quiet for the CAD. Another round of NAFTA negotiations between the US and Canada continued. 

However, no deal was reached last week. The US has set a deadline for Canada to join at the end of September. 

At the moment, it does not look really positive for a deal to be struck by the end of the month. The US has threatened to continue without Canada if the delaine cannot be met. 

Canada stated this week that the US needed to withdraw their threat of possible auto tariffs.

According to Canada they want assurance that a new NAFTA would exempt them from auto tariffs. 

On Friday, Kevin Hassett said the US was very close to having to move forward without Canada. This caused an initial spike higher in the USDCAD, but the moved was pared quickly afterwards. 

In terms of data, the most significant release was CAD CPI on Friday. Headline CPI came out as expected at 2.8%. 

We mentioned last week that the BOC’s preferred CPI readings are the CPI Trim, CPI Median and CPI Common.

All three these core inflation measures came out higher than prior and on or above the BOC’s 2% target. 

This is a good example of why knowing the Fundamental are so important. Even though CPI came out as expected, the CAD appreciated due to the higher core measures. 

This would be something the BOC would be happy about. 

The week ahead 

Once again most of the focus surrounding the CAD will be on the ongoing NAFTA negotiations. This is the last week of the deadline set by the Trump Administration. 

On Friday we will also see the GDP MM number for July. The market is expecting GDP to grind higher to 0.1% from 0.0% prior. 

It is important to note that the market’s expectations vary. Scotiabank expects GDP at 0.2% while Wells Fargo expects it at 0.0%. 

Even at 0.1% that would still bring annualized GDP above 2.0% which is above the BOC’s forecasts. 

Trade Ideas 

The NAFTA deadline is approaching very fast and pressure on the CAD might creep in the closer we get to Friday. 

Make sure to have your news squawk ready to take advantage of any short-term NAFTA related headlines. 

We don’t expect any fireworks from the GDP number on Friday. However, make sure to trade CAD in line with NAFTA sentiment at that time. 

Australia 

What happened last week? 

A surprising response from the AUD in the face of the escalation in tariffs between the US and China. With the announcement of an increase in tariffs we expected the AUD to be pressured. 

This was unexpected as the AUD is considered as a proxy for risk sentiment and Asian markets. Especially when considering that Australia sends over 30% of their exports to China. 

However, the exact opposite happened in the markets. In response to the lower intensity of tariffs from 25% to 10% the market went into a risk on tone for the whole week. 

Risk assets strengthened across the board along with commodity currencies like the AUD. ING points out that copper prices rallied 8% last week which also supported the AUD. 

The AUD also received another lift from the more upbeat RBA minutes released on Tuesday. Interestingly, the RBA noted trade tensions as a “material risk’ to their outlook. 

Could this be the start to a more resilient market with regards to Trade War escalations?

According to Westpac, the tariffs would not be as bad on the AUD as previously thought. 

It will be interesting to see whether other banks reached the same conclusions. 

The week ahead 

The economic calendar is very light for the AUD this week. 

For this reason, we expect prevalent risk tones to largely dictate AUD moves in the week ahead. So be sure to keep a close eye on risk sentiment in the market. 

The proposed tariffs on China will come into effect on Monday so keep that in mind and look for market reaction. 

Trade Ideas 

If the current risk-on tone persists this week we should continue to see the AUD appreciate. 

Thus, look for any possible change in the risk tone and trade them accordingly.

Trade headlines tend to cause lots of volatility so don’t forget risk management. 

United Kingdom 

What happened last week? 

Brexit, Brexit and more Brexit. Last week was another example of how politics can influence the markets. 

However, before we get there let’s look at the economic data releases for the pound last week. 

The GBP CPI on Wednesday totally smashed market expectations. All the CPI measures came out above analyst forecasts. 

CPI YY came in hot at 2.7% versus expectations of 2.4%. The Core CPI measure was 2.1% versus forecasts of 1.8%. 

Even the CPI MM and Core CPI MM beat expectations. The below chart shows that Core CPI has jumped back above the BOE’s 2% inflation target. 

The market saw a big jump on the CPI release but was kept in check with Brexit uncertainties.

On Thursday we also had the release of Retail Sales for August. 

This was another beat on expectations with a print of 3.3% versus a maximum forecast of 2.3%.

The GBP rallied for the biggest part of Thursday’s London session until bad news arrived. 

The informal EU summit in Salzburg ended really bad on Thursday. The EU threw a curve ball at the UK when they announced that Theresa May’s Chequers plan won’t work. 

This was a surprise since the EU was expected to have taken a softer stance to the UK‘s Brexit plans lately.

However, Theresa May threw more fuel on the fire with a heated press release on Friday afternoon. 

PM May warned said negotiations were at an impasse and stuck to her guns with regards to the Chequers plan.

According to Bloomberg, the pound dropped 1.5% in the wake of the press release. 

The week ahead 

A very light calendar awaits the pound in terms of economic data releases in the week ahead. The biggest focus once again will be Brexit developments. 

The annual Conservative Party Conference runs from 30 September to 3 October. According to Danske Bank, all the focus will rest on that for now. 

Rhetoric about a challenge to PM May’s leadership has been growing. The conference will tell us whether the rumours were true. 

Trade Ideas 

We would not want to be long on the pound at the moment given the recent negative Brexit turn. Having said that, selling at the lows is also never a good option. 

Taking a wait and see approach with the pound would be a wise choice. Alternatively, look for shorting opportunities if the market provides pullbacks. 

Keep the news squawk on and ready to jump at any further Brexit developments. 

Eurozone 

What happened last week? 

Overall it was a very quiet week for the EUR last week. The biggest releases in terms of data was the Flash Manufacturing and Services PMI’s. 

Manufacturing PMI missed expectations at 53.3 versus 54.4. However, Services PMI came in at 54.7 versus a forecast of 54.4. 

According to Wells Fargo, the current PMI’s still point to a GDP of between 1.5% to 2.0% for the Euro Zone.

The main point here is that there is so far nothing that appears to have required a change from the ECB’s rate path.  

The it interesting to note that the EUR did strengthen across the board last week. However, this was more due to dollar weakness than EUR strength. 

The week ahead 

The main focus for the EUR in the week ahead is will be on EUR CPI released on Friday. 

All the focus will be on the important Core CPI number which is the main focus for the ECB at this stage.

The chart below shows how Core CPI has been stuck around the 1.0% level for some time. 

The ECB’s inflation target is 2%, so even at the expected release of 1.1% current inflation is far from their target.

That is why ING believes that this week’s CPI release will not provide fireworks. 

ING also states that a release on target is unlikely to pull the ECB out of their current “autopilot” mode. 

Trade Ideas 

If last week’s dollar decline continues we can expect the EUR to remain supported for as long as that is the case. 

Keep your ears open for Brexit news as any major developments can move the EUR along with the Pound. Then on Friday, consider taking advantage of any surprise beat or miss on Core CPI. 

However, take note to only trade those events in line with the EUR and Dollar sentiment at that time. 

Japan  

What happened last week? 

The BOJ kept policy rates unchanged as was widely expected by the market. However, Wells Fargo states that the BOJ will be on hold for the foreseeable future due to Core CPI still very low at 0.9% 

Apart from the BOJ rate decision that was not a lot that happened with the JPY last week.

The JPY was pressured for the biggest part of the week due to the risk on tone and safe haven outflows. 

The week ahead 

On Friday we will see the latest labour report from Japan. According the Danske Bank, the labour market has turned increasingly tight. 

This is a positive for the BOJ as a tighter job market will eventually push wages higher and boost CPI. Having said that, we are not expecting any fireworks from the release. 

Trade Ideas 

With the data front being quiet we expect the bulk of the moves in the JPY to be risk related. 

Look for possible JPY shorts on a continuation of the risk on tone from last week. Alternatively, look for possible JPY long opportunities if the risk tone deteriorates. 

Switzerland 

What happened last week? 

On Thursday we had the SNB’s rate decision. The SNB kept interest rates unchanged in line with the market’s consensus. 

There were no real changes to the usual rhetoric from the SNB. The most important point from the statement was that the bank cut their CPI forecasts for 2019 and 2020. 

Furthermore, they continued their normal rhetoric stating that the CHF is highly valued. They also emphasized that FX intervention is possible if the CHF appreciation continues. 

ING believes that the recent CHF appreciation will continue. The reasons they give for the rally in the CHF over the past couple months is safe haven in flows. 

They state the first reason for the rally was the Italian political issues and as of Friday it was Brexit. The CHF had a big rally on Friday which inversely matched the drop in GBP. 

The week ahead 

The week is very thin for the CHF in terms of data points. The only release of note will be the KOF Economic Barometer on Friday. 

However, the market’s main focus will probably dwarf any data points. 

Trade Ideas 

With recent CHF appreciation the odds of a SNB intervention is ticking closer. The CHF might be a better pair to sit out of at the moment. 

There is a mixed picture on the CHF right now. On the one hand the SNB might intervene to weaken the currency. 

On the other hand, the CHF might continue to strengthen on any negative Brexit issues. 

With the two-way possibilities it might be best to take a wait and see approach for now. 

Wrap up 

Watch out for the official announcement of trade tariffs between the US and China. It is possible any negative reaction from it might be faded like last week. 

In terms of economic data, the most important ones will be the FED and RBNZ rate decisions. 

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

Feel free to leave any comments or questions below. 

 

Comments

comments

WANT 50% OFF FOREX SOURCE?

Download this free “Forex News Trading 101” guide for your chance to win a 50% discount on a monthly Forex Source subscription.