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Collinson FX: Aug 2 - Big tariff causes market chaos

by Collinson FX 1 Aug 19:51 PDT 2 August 2019

Collinson FX: August 2, 2019 - AUD hits 10yr low

Trump seized the market narrative once again overnight. Trump imposed a 10% tariff on the remaining $300 Billion in Chinese imports to the USA.

The US Treasury Secretary Mnuchin and lead negotiator Lighthizer completed a new round of trade talks in Shanghai, which the President described as constructive. Obviously not constructive enough!

The imposition of this massive tariff had an immediate and enormous impact on markets. Oil prices crashed, Gold spiked and US Bond Yields collapsed. The safe haven status of the Yen allowed the currency to rally to 107.40. Trump has reacted strongly to the failure of the Chinese to reach an agreement and cited further aggravating factors. Trump alleges that the Chinese have failed to stop the massive flow of fentanyl, which ‘kills Americans’, while failing to raise US agriculture imports, as agreed at the G20. US 10 year Bond Yields collapsed to 1.89% and equities crashed, sending markets in to turmoil over global growth prospects.

The AUD is heavily trade dependent and suffered badly from the Trump announcement, falling to a 10 year low of 0.6800. The NZD coped relatively well, slipping below 0.6550, but had suffered serious losses before the proclamation. The Bank of England left rates unchanged and cited the risks of Brexit and global growth, as a reason to add further monetary stimulus, as necessary. The GBP had also been smashed recently, due to ‘no deal Brexit’ worries, so the Banks decision was no surprise. The GBP traded 1.2140, while the trade war news was also absorbed, post the Central banks commentary.

Markets now await the important Non Farm Payroll and Employment numbers from the US, released tonight, but remain shell-shocked after the Trump declaration and expansion of the US/China trade war. It is never boring with Trump in charge!

Collinson FX: August 1, 2019 - Fed cuts rates

The Federal Reserve cut rates from 2.25% to 2%, for the first time in more than 10 years. The surprise was the commentary that accompanied the rate cut. The Fed was surprisingly hawkish, with a big ‘BUT’ in the commentary, emphasising that this was not an easing cycle. This sent panic through the markets, triggering a sell-off in equity markets, while the Dollar jumped higher. The EUR fell back to 1.1070, not assisted by the further degradation of EU GDP, which fell back to 1.1%.

The spike in the reserve was reflected in the trade exposed currencies, with the NZD plunging to 0.6550, while the AUD fell to 0.6830. The NZ Business Confidence survey has become an important barometer of the NZ economy despite the political ignorance and this collapsed to a record 44.3. The much loved Labour-led coalition Government, (by the global ‘luvvies’), does not appear to have the confidence of the business community in NZ? The NZ Government has stumbled on nearly every policy promise and are now running out of historical economic data support. The long stream of positive economic data has been a hang-over from the competence of the previous administration and the extinction of this, may signal a desperate early election?

Commodity currencies were not assisted by the progress of US/China trade talks, which ended in Shanghai, but Washington talks are delayed and deferred until September. Progress was apparently made, but the Chinese are looking for a more compliant Government to obtain a softer trade agreement. They continue to ignore the pain and play the ‘long game’.

Collinson FX: July 31, 2019 - Oil Spikes

Equity markets were soft and Oil prices spiked ahead of the Fed’s rate decision. The forerunner to the Fed was the Bank of Japan, who decided to leaves rates unchanged (although they are already negative), but assured markets that stimulus would be available ‘without hesitation’ if the slowdown in global growth demanded. The US markets keenly awaited the Feds decision, but was preoccupied with a twitter attack on China from President Trump. Trump accused the Chinese of not living up to their G20 promise, to rapidly increase US agricultural imports. He claims the Chinese, who are sitting down for reignited trade talks this week in Shanghai, are waiting out the clock. He says they are hoping for a Democrat victory in next years Presidential election to take advantage of soft negotiators. Oil spiked to 58.10, while the Dollar was steady.

Commodity currencies were not enamoured by the progress of the trade talks, with the AUD falling to 0.6870, while the NZD attempts to hold on to 0.6600. US Housing data was positive, with rises in the S&P Case Shiller Home Prices and Pending Home Sales. Australian Building Approvals reveal a bit of a crises, with a contraction of 25.6%, for the year! Global growth prospects remain the major threat to markets and these are heavily contingent on the US/China Trade talks.

Collinson FX: July 30, 2019 - Fed rate cut expected tomorrow

Markets opened the week quietly, keenly awaiting a huge week of economic data releases and Central Bank meetings. The Fed meets for a two day meeting later tonight, with a rate cut expected to be announced tomorrow. The US economy continues to expand at a healthy rate, although global growth fears will influence trade, thereby encouraging the Fed to cut rates. The Fed has also been under political pressure from President Trump, who in his latest tweet, observed that the EU and China were adding monetary stimulus to their economies and the Fed needs to counter. The strong Dollar remains, with the EUR trading 1.1140, while the Yen holds 108.70.

The US Trade negotiation team will be in Shanghai this week, to re-ignite trade talks, which will be followed by return talks in Washington. Expectations have been played down, but speculation will influence markets. The trade talks will impact the trade exposed commodity currencies, with the AUD trading around 0.6900, while the NZD holds above 0.6600. Local data will have influence on the currencies, but the overwhelming driver will be the trade talks and Fed action/inaction.

Collinson FX: July 29, 2019 - No 'Grand Deal' with China this week

US GDP beat expectations, with growth coming in at 2.1% for the second quarter of 2019, confirming the strong domestic economy. GDP growth was supported by Consumer and Government spending, although a contraction in Business Investment, may be the trigger for the Fedneeds to cut rates next week. The Fed begins a two day meeting next Tuesday and is expected to be ‘dovish’ in their monetary policy stance. The majority of analysts expect a rate cut, but do not be surprised if Chairman Powell punts the opportunity, despite huge pressure from President Trump. The Bank of England and the Bank of Japan will also release their latest rate decision, with the B of E resisted the temptation to cut recently, but now has a new Government leader in the shape of Boris Johnson, while the Japanese already have negative rates. The Dollar continues to reflect the strong domestic US economy, with the GBP falling to 1.2380, while the yen moved to 108.60.

The rising reserve is also impacting the underperforming commodity currencies, with the AUD falling to 0.6900, while the NZD trade 0.6625. These trade exposed currencies have not fared well recently, buffeted by the lack of progress in the US/China trade war. Key Trump economic adviser, Larry Kudlow, poured cold water on the prospect of an agreement from negotiations in China this coming week. Kudlow warned not to expect a ‘Grand Deal’ this coming week. President Trump was equally tepid in his enthusiasm for a result, hinting that the Chinese may be playing the long game, waiting for the Presidential election and the chances of getting a better deal from a weaker Democrat.

The coming week sees an avalanche of global economic data releases and Central Bank meetings, speculations and decisions. This will climax in the release of Friday’s Non-Farm Payroll’s and US employment numbers. The Treasury Secretary Mnuchin and lead trade negotiator Robert Lighthizer, travel to Shanghai this week, to jump start the ongoing trade talks. This should encourage speculation and market volatility, along with Central bank action and economic data releases.

Collinson FX: May 26, 2019 - UKP drifts on BoJo uncertainty

The ECB punted any action on monetary policy but insinuated that it may well act on stimulus later in the year. The ECB is between a rock and a hard place, with rates sitting at 0.4%, giving little latitude for cuts. The ECB Chairman Mario Draghi did comment that the economic situation was getting 'worse and worse' but declined action. The EU is in a parlous position, with economic growth risks arising from trade and growth challenges, while the looming Brexit remains an existential threat. The EUR traded 1.1140, while the GBP drifted to 1.2450, as PM 'BOJO' announced his new pro-Brexit Cabinet. Boris Johnson has ascended to power to great fanfare a the promise that action speaks louder than words.

US Durable Goods Orders jumped 2% and confirmed the economic strength in the domestic market. This supported the argument, 'that the economy is strong' and does not require action from the Federal Reserve. The ECB declined to act and that now supports inaction from the Fed. US Bond Yields firmed, along with the Dollar. The Yen traded 108.70. Commodity currencies continued to suffer the rising reserve, with the AUD trading 0.6940, while the NZD slipped to 0.6650.

The US meet their Chinese counterparts next week in Shanghai, with the promise of a return meeting in Washington. The trade war has been extended and continues to undermine the trade exposed commodity currencies.

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