Back To The Good Ol' Trade Wars

Market Analysis /
06 Aug 2018

After a busy week last week with the interest rate verdicts and the US jobs report this week sees us settle back to good ol' trade wars. James Hughes talks you through Monday's market moves.



Donald Trump’s continued threats towards China have left the US dollar in the ascendancy once again as we head into the new week. Last week the President threatened another 25% tariff on another $200 billion worth of Chinese imports. Add this to the stronger domestic data out of the US, and you have the reason for the US dollar strength once again.  

The US – China trade war is front and centre for investors and global markets this week. The move from the US last week was met with the expected retaliation by the Peoples Bank of China as they tried to stop the slide in the Yuan by reintroducing reserve requirements.

The tit for tat nature will yet again cause investors to jump into the US dollar and could well push the greenback into a stronger position before the week is out. US CPI data due for release on Friday could be the only data point that could derail the move, but with the domestic data still positive that seems unlikely.



After a couple of weeks dominated by data and the European Central Bank it seems it may well be Italian politics that comes into focus for traders. The issue this time is the budgets, with the coalition in Italy having to walk the tightrope of meeting promises outline in the election process, and adhering to the Europe’s monetary and economic union rules.

With very little due for release in terms of macro data from the Eurozone this week we will have to look on the domestic front with data due from Germany. The trade balance numbers will be of particular focus here as we will look to see if the tariff restrictions are having any effect on the overall numbers.



Revised UK Q2 GDP numbers on Friday will be the one to watch in terms of the UK. After Bank of England Governor Mark Carney’s caution over the country’s economic outlook on Thursday, a downward revision here would validate his view. If that does happen then the already beleaguered pound could be in store for another beating.

The tone was a little more hawkish from the BoE on Thursday last week as the central bank raised interest rates for only the second time since the financial crisis over 10 years ago. Interest rates now sit at 0.75% in the UK. The UK needs rates to be that bit higher to pave the way for more stimulus measures when the economy next starts to slow, and with so many unknown quantities surrounding a no deal Brexit that could be sooner than expected.



The Nafta news flow has been mixed for the Canadian dollar. On the one hand, US officials continue to suggest a deal is within sight; however, a bilateral meeting between the US and Mexico on trade has created some noise over Canada potentially being sidelined from the negotiations. Last weeks Canadian GDP data came in better than expected, which was not necessarily a surprise given the positive data of late. It also wouldn’t be a surprise for the Bank of Canada either with expectations growth with every positive data release that we could get another rate hike at the October meeting. Probability now sits at above 70% for an October move in rates, and a continued theme in data could show positive readings in both the PMI and Canadian jobs report this week.



The deluge of rate verdicts is finally over after the Reserve Bank of Australia meeting on Tuesday. This was obviously the focal point for the week in terms of the Australian dollar, and as expected the dominating force in the ongoing US – China trade wars.

The data flow has been mixed since the July meeting - with stronger jobs growth offset by a weaker than expected Q2 CPI. However, the central bank may be forced to acknowledge recent political developments - and what could be a period of domestic political uncertainty ahead of early 2019 elections. We also get the RBA's latest quarterly economic projections on Friday.



The RBNZ meeting this week will also see the statement release as well as press conference from Governor Orr. The focus will be on just how the RBNZ see the rate path, current expectations show that it could be late 2019 before we see any hint of a movement in rates in New Zealand, but Governor Orr’s outlook will be one of the major market moving aspects. What will be key to any movement in rates will be wage growth, with unemployment below the 4.5% we will want to see average earnings jump above the 2% inflation target.

Aside from the rate decision it will be the inflation expectation survey for the third quarter that will catch our eye on Wednesday followed by the manufacturing PMI data on Thursday.

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