A Professional Warning
On Monday, the US Chamber of Commerce released a study warning Trump that his trade policy with the rest of the world could severely jeopardize the US economy. The harsh criticism coming from the CoC is surprising, since so far they’ve been the staunchest supporters of the Republican party. CoC President Tom Donohue stated that the administration’s current policies do not promote the common goal of a fair and open trade system, but undermine it. He went on to say that the consequences could be detrimental to US economic growth. Meanwhile, the President reprimanded the World Trade Order, claiming unfair treatment of the United States and that “if they don’t treat us properly, we will be doing something.”
Chinese Turbulence
The yuan’s devaluation set the tone for today’s trading session in China. Recent tensions between the US and China caused investors to sell the Chinese currency. As a result, it fell to 6.7 against the dollar for the first time since July 2017. The People’s Bank of China called this market reaction to the upcoming July 6 tariffs irrational and excessive. Several news outlets reported that the yuan’s (and Chinese stock) sudden shift from their sharp downwards trend the following day might have been the result of the central bank covertly intervening in the markets. The yuan strengthened back to 6.68 and the Shanghai Composite closed in the positive at 2781 despite being only 2740 at midday. This increase had a positive effect on other indices as well, though neither Nikkei nor the Hang Seng managed to close in the green.
AUDUSD
Today the Reserve Bank of Australia chose not to change their 1.5% base interest rate. They explained their decision by claiming the Australian economy has been doing better than expected. The RBA predicts 3% annual GDP growth in 2018-2019 and last quarter’s 3.1% growth supports this estimate. Economic growth was stimulated by rising prices on the commodities market, despite the acceptable 2% inflation figure. The market welcomed the positive RBA statement, causing the ASX 200 index to rise by 0.5% in spite of the market’s overall pessimistic attitude. The Aussie dollar also took the news well.
The AUD hovered near 0.7332 while anticipating the RBA statement. This price level was last seen in 2016 and has served as a persistent line of support ever since. We can safely say that for the last two years this price has been the lower limit of the Aussie dollar versus the US dollar. The chart clearly shows that the AUD has been continually weakening against the USD, however, the movement itself is characterised by a calm, gradual trend channel. The lower limit of the channel is already below the 0.73320 support line. Price tested the line on Monday, but quickly corrected back above it. The latest interest rate decision and Australia’s current economic outlook both suggest there will be no further rate hikes this year, unlike the US. This indicates the continuation of the current trend, meaning the AUDUSD pair may fall even lower. Today’s upwards surge could hit its next resistance at 0.7411, the upper limit of the channel. Price failing to break this line would act as confirmation of the trend channel’s power and signal another upcoming retest for the 0.7332 line.
EURGBP
Brexit is the driving force behind the movements of the EURGBP currency pair right now. The UK government continues to struggle in its negotiations as both advocates and opponents of Brexit are equally unsatisfied with the latest deal. Meanwhile British international schools show a 60% drop in enrollment numbers. The underlying reason being that highly qualified individuals with international experience are leaving the country in large numbers, sharply lowering the demand for these institutions. Both the EU and UK economic regions have a vested interest in keeping the price of their respective currencies stable, especially since the Japanese yen has managed to strengthen against both.
This desire for stability is reflected in the charts, where price has been moving in a narrow channel since mid April. The upper limit of this range was 0.8837 while the lower limit 0.8700. Traders managed to hold price in this 130 pip range despite markets being volatile due to US trade tensions. Price finally broke out on June 28, when the euro breached the upper limit and climbed to 0.8890. The breakout itself did not have much momentum, since price quickly retreated back to the former 0.8837 resistance line (now acting as a support) and continues to hover around it. There is a minor trend that indicates further upwards movement, however, this has not been confirmed. The breakout’s short lifespan suggests price moving back to its earlier range is more likely.
Sincerely,
Laszlo | Market Analyst
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