Just when we thought the first round of global trade wars were under control it seems that the situation has been . Last week saw the Trump administration go back to those already exempt, to impose the steel and aluminum tariffs on Mexico, China, Canada and the Euro area.
China has already warned that further sanctions against Beijing would lead to a total breakdown in their diplomatic trade talks. This topic is likely to dominate US dollar pairs for most of the week, despite the better than expected US jobs data released on Friday. Trump’s actions in the White House, on both trade and state matters, again have markets and investors nervous.
With economic data thin this week, it is likely that political issues will be the driving force behind any dollar moves. As well as the trade issues, the on/off nature of the summit with Kim Jong Un is also going to be factor as the June 12 Singapore meeting fast approaches.
Yet again, its politics that are the driving force behind moves in the Euro, and after the big swings of last week, investors will be looking for stability in the key regions, most notably Italy and Spain. The Italian banking system is in dire need of a government that can act fast and pass legislation, and Monday’s confirmation of Giuseppe Conte as Prime Minister should go a little way in easing some of the tension.
However, Italian coalition governments have notoriously struggled to pass legislation, so until meaningful progress is made, there is likely to be ongoing fear within the markets about the financial stability of the country.
The fact that new governments are in place in both Italy and Spain, and that both are looking to move forward, means that we could see a rebound in stocks and bond prices. This means that the currency could stabilize. Focus later in the week will be on the April retail sales data and German industrial production.
Things are moving in the right direction for the Bank of England if they want to raise interest rates at the August policy meeting. Data has been a little more favorable in the UK over the last week. But, the probability for the August rate hike still only sits at 39.9%.
As we know, Brexit headlines continue to derail any upside that Sterling manages to gain against its counterpart currencies. The downward moves that the Pound suffers, however, does seem to lead to a large amount of upside in the following days as investors see the lower levels as buying opportunities. The need for a prolonged period without unsettling Brexit headlines is something that those with Sterling risk are longing for, and could be waiting a long time for.
This week sees collection of data points from the UK with the headline act coming with the PMI data.
Yet again it’s NAFTA that dominates, and friction between Canada and the US on trade threatens to derail these talks even further. The Bank of Canada sent a strong message last week that they are looking to raise rates in July, however, due to the lack of progress over the NAFTA deal it would have to be on the back of continues strong economic data. Probability for a hike in rates in July is up at 74% after last week’s meeting.
Trump’s decision to impose the steel and aluminum tariffs on Canada and not extend the exemption was a clear escalation in trade friction between the two nations, and has led to Prime Minister Trudeau imposing retaliatory dollar for dollar tariffs on the US. It seems any hope of a near term deal on NAFTA could be fading, especially after rumors that Trump pulled a potential deal earlier in May in order to push through the “sunset clause”, a clause both Mexico and Canada strongly object to.
The June Reserve Bank of Australia (RBA) meeting on Tuesday should have been the big headline event of the week, however, it now looks as though it be could a “non-event.” There has been clear rhetoric out of Australia that there are no plans in place to raise rates this year. Economic data since the May RBA meeting has been fairly mixed - with decent jobs growth offset by softer wage growth and disappointing Q1 private capex data.
The statement could be a little mixed, which means it’s overall tone is unchanged from previous meetings. So instead of the focus being on the RBA, we will instead focus on the Q1 GDP release on .
One eye should also be on the US, of course, as the escalation of trade disputes could derail any upside in the Aussie pairs.
Geopolitical tensions instigated by the US will be the primary focus for the Kiwi this week, as the domestic agenda looks particularly quiet. There is potential that the recent escalation in trade wars could be a turning point for the US dollar. If that is the case, the upside in the US dollar could have a big downside effect on the Kiwi and other Kiwi denominated pairs.
With the expectations of further escalating trade wars, it could be a nervous week for currencies like the New Zealand dollar that are so dependent on US dollar’s stability.
Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support