Volatility Returns as US Plans To Raise Tariffs Due to China Renege

Michael Moran

Michael Moran is an experienced global markets professional who currently writes a daily markets commentary. Moran has traded currencies for over 30 years, having worked in dealing rooms of major banks all over the globe. He lives in Sydney with his wife, 5 children, 2 grandsons and another coming. He still loves trading and talking about the currency markets. All of them! Michael began his career as an assistant dealer in money markets and foreign exchange with Lloyds Bank. He has worked in Hongkong, Manila, Tokyo, Singapore and Sydney. He’s traded through the 1985 Plaza Accord, Paul Keating’s 1986 “banana republic” statement, the Asian Currency Crisis in 1997, and the 9/11 New York Twin Tower terrorist strike. He took the task of speaking to sales team of the banks he worked at (Lloyds, NAB, CBA) during the daily morning meetings. Other traders hated this job. But he developed a liking for commentating and putting forward his views on currencies, in the process helping others. Which he still does today. Moran wrote briefly for Invast Global before taking the position as senior analyst for Royal Financial Trading. He currently is a Responsible Manager in Compliance for Transferwise Ltd, Pty, a global money transfer firm where he advises the Treasury team. Having spent the last 10 years of his trading career managing the Emerging Markets and Asian currency desks of NAB and CBA, he formulates much of his market analysis from their movements. His favourite description for global markets today comes a 1968 hit tune from the group Blood, Sweat and Tears – “What goes up, must come down, spinning wheel got to go round.”

Forex Analysis

Volatility Returns as US Plans To Raise Tariffs Due to China Renege

May 7, 2019

Summary: Markets re-discovered volatility following Donald Trump’s tweets yesterday which ended the tariff truce with China. China’s Foreign Ministry said they would still send a trade delegation to Washington. Risk assets (stocks, commodities, the Aussie and USD/JPY) pared losses. Just at the bell, US top trade negotiator, Robert Lighthizer accused Beijing of reneging on commitments it made during negotiations. And that the US plans to raise tariffs on Chinese goods. Volatility returned, stocks, yields and risk assets fell. China’s Offshore Yuan plummeted, USD/CNH closed 6.7910 from 6.7350, it’s weakest since January. The Dollar Index (USD/DXY) ended little-changed at 97.557 (97.48). USD/JPY rallied back from near 3-week lows to 110.72 (111.10 yesterday). The Australian Dollar extended its fall to 0.6989 (0.7023), down 0.4% while the Kiwi fell to 0.6608 (0.6645). The Dollar was higher against the Emerging Market currencies.  USD/ZAR soared 1.73% to 14.4425 (14.3300). USD/TRY (Dollar – Turkish Lira) rallied 1.97% to 6.0800 ((5.9800 yesterday). Bond yields are lower. The US 10-year Treasury yield fell 6 basis points to 2.47%. Australia’s 10-year bond yield dropped to 1.73% from 1.79%.  Stocks fell back but clawed back from their lows. The DOW closed at 26,290 (26,525 yesterday) while the S&P 500 was at 2,932 (2,945).

  • AUD/USD The Australian Dollar remained under pressure with the market’s risk-off stance and today’s RBA rate decision. The line ball call saw AUD/USD close at 0.6989, under the 0.780 cent psychological support level. AUD/USD traded to an overnight low at 0.69627.
DAILY FX USD JPY 1 D Chart - 07 May 2019
DAILY FX USD JPY 1 D Chart – 07 May 2019
  • USD/JPY – Risk aversion continued to favour the Yen. The Dollar slid to 110.282, near 3-week lows before settling at 110.72.
  • EUR/USD – the Euro was little-changed, finishing around 1.1200 (1.1202 yesterday). Euro area Services PMI’s were in line with expectations while Retail Sales saw a small improvement. EUR/USD traded to an overnight low of 1.11642. The deterioration in trade negotiations between Beijing and Washington puts pressure on the EU, who have their trade issues with the US.

On the Lookout: Welcome back volatility! Markets were lulled into a false sense of security with majority of participants expecting that a trade settlement between the US and China was a gimme. President Trump and his trade team are not happy with China’s backpedalling on some of its commitments and responded.
Australia’s central bank (RBA) will announce its monetary policy decision in the most anticipated interest rate verdict in recent years. Almost half of the analysts polled by Bloomberg expect the RBA to cut rates by 0.25% to 1.25% (1.5%) for the first time since August 2016. Australia’s economic growth has slowed markedly since the second half of last year while inflationary pressures weakened.
Today sees Australian April Retail Sales and Trade Balance data before the RBA rate decision. German Factory Orders and the EU Economic forecasts are top of the European reports. The US JOLT Job Openings round off the day’s economic data.

Trading Perspective: The Dollar remains supported but within a range overall against most of its major Rivals. The market’s risk-off stance and central bank meetings this week will keep the pressure on the Aussie, Kiwi and EM Asian currencies. Asian central banks from Malaysia, Thailand and Philippines meet on policy this week. Subdued inflation in Malaysia and the Philippines could see rate cuts from both countries central banks. The Bank of Thailand is more likely to stay on hold. Renewed drama on trade between the US and China provides added threat to global economic risks.
In Europe, local issues will have more impact on their currencies. Euro area composite Services PMI’s were mostly in line with forecasts. Progress on Brexit talks between the UK’s main two parties remain elusive.

INVESTING.COM AUD USD Hourly Chart - 07 MAY 2019
INVESTING.COM AUD USD Hourly Chart – 07 MAY 2019
  1. AUD/USD – Half of the market are expecting the RBA to cut its Official Cash rate to 1.25% from 1.5% today. Me thinks not. The Australian Dollar made a decent recovery overnight from the lows triggered at 0.6962 following Trump’s tweet yesterday to 0.6990 at the close. The 0.6960 support level is immediate and should hold regardless of what the RBA’s decision is. The Aussies current level reflects the market expectations. Immediate resistance lies at 0.7005 followed by 0.7030. Expect a range initially between 0.6960 and 0.7010.
  2. USD/JPY – The Dollar will stay on the defensive against the Yen. US 10-year yields fell 6 basis points to 2.47%. Japan’s 10-year JGB yield was unchanged at -0.06%. The combination of risk-aversion and a narrowing differential between US and Japans yields favours a continuation of USD/JPY’s downtrend. USD/JPY has immediate resistance at 111.00 (overnight high 110.99). Immediate support can be found at 110.50 followed by 110.20. Look to sell rallies with a likely range today of 110.30-111.00.
  3. EUR/USD – The Euro should continue to trade within its overnight range for today. Let’s not forget the speculative Euro short bets are at multi-year highs. EUR/USD has immediate resistance at 112.10 (overnight high 1.1209). Immediate support can be found at 1.1170 followed by 1.1140. Look to buy dips with a likely range today of 1.1170-1.1240.

Happy trading all.

Login To MyTis Comment Or Register to MyTIS

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Newsletter

Register now to receive the latest news and information for global trading industry.

Latest Articles

BIS, International Settlements, Basel III

BIS: Basel Committee reports on Basel III implementation progress

Report sets out the adoption status of Basel III standards in member jurisdictions as of end-May 2020 Report shows further progress in implementing these standards since previous report in October …

0
Would love your thoughts, please comment.x
()
x