200 Billion Dollar Package
Yesterday the US government expanded the list of Chinese products to be targeted by tariffs for a sum total of 200 billion US dollars. Most likely this measure will go into effect after August 31. The new list covered a wide array of products including various food- and chemical products, tobacco, coal, steel, aluminum, car tires, and cosmetics.
This specific package seems aimed at retail goods and will likely also have an effect on US inflation. The US government claims this is the result of China forcing their hand by refusing to change their allegedly unfair trade practices. The potential short-term gains of such strong-arm policies are tempting, though it could force the world’s largest economies to retreat into a protectionist shell. If that were to happen, it would be to the detriment of a global trade system that was already heavily in the USA’s favor, due to how they had helped set it up in the first place.
An Exciting Day
In the grand scheme of this week’s trading, today’s highly anticipated Bank of Canada interest rate decision ended up being only of secondary importance. Yesterday the USA took the spotlight with their latest tariff announcement, which has left investors worried about China’s inevitable response.
Meanwhile at the upcoming NATO summit, President Trump will have the opportunity to speak with European leaders about mending their relationship. Top EU officials will also be meeting Japanese Prime Minister Shinzo Abe to discuss the challenges facing global trade and potentially renegotiate their trade relations, possibly in the form of a free trade agreement. Of all the exciting news to look forward to today, the only point of certainty so far was the US tariff announcement, thus that is what the Asian trading session decided to base their trades on. New developments in the trade war brought the bears out of hibernation. The Shanghai, Hong Kong and Tokyo indices were all under massive pressure from the tariffs, resulting in losses of over 1%. Their pessimism affected European markets as well, where indices across the board fell by a comparable amount. The London FTSE is now 1.5% below where it closed yesterday.
EURUSD
Global stock exchanges reacted drastically to the latest act of the US-China trade war, however, currency markets remained surprisingly calm. The pair with the largest trade volume, the EURUSD, has been almost stuck to its moving average for the past 12 hours, moving within a range of 20 pips. Aside from low volatility, the chart also shows that there is no defining trend to speak of. When one of the benchmark currencies of the Forex market comes to a standstill, it may be worth taking a closer look at the underlying reasons.
Presumably this is caused by investors cautiously staying away from the currency market due to high uncertainty. The taxing of consumer goods produced in China will have an inevitable effect on US retail prices over the second half of this year. Because the tariffs won’t go into effect before September, we’ll only be able to see how they affect inflation in the 3rd and 4th fiscal quarters. If the Fed already had plans to raise interest rates before the tariffs, then accelerating inflation will likely cause them to do so at a faster pace and possibly aim for a higher target than initially planned. This will further increase the gap between US and EU interest rate. Analysts have previously pointed to interest rate hikes as the driving force behind the USD’s rising value. Going by that theory, current events suggest the dollar will continue to strengthen. So far the charts do not show any signs of that happening. The current narrow range of movement is not sustainable on a day as busy as today, so a break out will likely happen soon. Long-term trends and fundamentals both suggest that a downwards trend is more likely.
EURJPY
The EU-Japan meeting is a good reason to examine the currencies of both regions. The yen has become the primary tool of stimulating Japan’s economy and increasing it’s competitiveness. At the same time Japan’s predictable and reliable monetary police has made it a safe haven currency in Asia. In times of uncertainty these two characteristics are often at odds, since the currency strengthens when investors buy it to reduce their risk, while the government’s goal is to keep it as weak as possible to increase competitiveness. In the case of the EURJPY, the Japanese government’s interests prevailed against the interests of safe haven investors. After reaching its low mid May, the Euro has been on the rise against the yen ever since.
This upwards trend started from 124.62 with sudden upwards surge, but then rebounded and took on a more gradual and sustainable rising trend. The upper limit of the earlier brief spike was between 130.30-130.50, which proved itself a persistent line of resistance by stopping the current slow trend as well. It seems both investors and businesses undeniably have a vested interest in keeping the EURJPY at or below 130. On a technical level the area between 130.40 and 131.36 could effectively form the upper limit of the currency pair for now.
Sincerely,
Laszlo | Market Analyst
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