Time is Running Out
There is only one day left until the new US tariffs go into effect. Traders and investors have already given up hope that China and the United States will come to an agreement. The upcoming July 6 tariffs will affect 36 billion dollars worth of imported goods. Tensions rise as time runs out, with numerous reports stating how these changes will affect the global economy. Meanwhile China is also taking an increasingly aggressive tone, escalating the situation to what is undeniably a trade war at this point. Countries whose GDP is heavily dependant on electronics and the auto industry will be hit the hardest. According to a report by Pictet Asset Management, these countries are Taiwan, Hungary, the Czech Republic, South Korea and Singapore.
China has made it clear in no uncertain terms that they will swiftly retaliate in kind. China’s own trade barriers against the US go into effect the same day. Gao Feng, spokesperson for China’s Ministry of Commerce, said these “U.S. measures are essentially attacking global supply and value chains. To put it simply, the U.S. is opening fire on the entire world, including itself.”
A Continuing Trend
Today’s Asian trading session continued with the recent trend. Indices experienced a steady 1% daily decline, broken up by occasional days of price correction and today was no different. The Shanghai Composite and the Hang Seng fell by 1%, the Japanese Nikkei dropped 0.78% and the KOSPI ended 0.45% in the negative. Australia’s index on the other hand strengthened by 0.5%, which could be a sign of hope for the region as a whole. Meanwhile prices for oil and copper also declined by 0.5% and 2% respectively during this period. At the same time precious metals are making a bit of a comeback, slightly strengthening over the course of the day. The dollar index declined, indicating the USD weakened as EURUSD is once again above 1.17, meaning a 0.41% increase today for the euro.
USDCAD
It seems the US dollar’s upwards trend came to a halt in early July. Following a considerable breakout against the Canadian dollar in June, the USD seems to have peaked around 1.3388. Price shifted to a low range sideways movement, only making two more attempts to increase further. Both attempts succeeded in pushing price above 1.3343, but lacked the momentum to truly break the line and stay above it persistently. The result in both cases was price rebounding back, however, the second rebound turned into a significant decline.
After trying to reach new heights, price tumbled down all the way to 1.3127 where it was caught by a powerful support line. The USD has been gravitating towards this line for a while now. The furthest away it could go since July 3 was 1.3160, which is a distance of only 30 pips. Heavy trading of the support line resulted in a sideways movement that eventually reached the yellow line indicating long term trend. The trend suggests price will move upwards and the presence of a strong line of support seems to confirm this. Once US traders return from their day off, volatility is certain to increase. If the trend does continue, then price’s next target will be its previous 1.3343 peak. Price suddenly spiking above 1.33 could indicate the formation of a new channel between 1.3127 and 1.3343. This range could define the trading of the currency pair up until the end of summer.
USDCHF
One of the most difficult decisions imaginable for traders is trying to predict which direction price will go when it’s located at the center of a channel and trendlines indicate it could go either way. That is the exact situation the USDCHF pair finds itself. Price is currently at the mid point of the channel it has been moving in since June 14. The fluctuation of price waves gradually compressed itself until going almost completely flat at the center of the channel. Using the Fibonacci retracement tool on the chart perfectly illustrates this process. Initially it moved between 0-100%, then narrowed to 25-75% and finally limited itself to 38.2-61.8% since early July.
When there’s no definite trend and even channels fail to provide any clear hints on which direction price will go, most investors simply choose to play the waiting game. What this means is keeping an eye out for any relevant macroeconomic data or political decision that could break the stalemate. Switzerland released their inflation figures today showing that annual inflation was 1.1% between June 2017 and June 2018. The final data only marginally exceeded the predicted 1% and is still well within the acceptable range, especially considering their consumer prices between May 2018 and June 2018 did not change at all. It can be safely said that the Swiss National Bank is not worried about inflation. News from the US on the other hand promises a lot more excitement. Reports from ADP and ISM often cause large fluctuations in the trading of the dollar and could possibly set the tone for the USDCHF today. Of the two, the ISM Purchasing Managers’ Index seems more promising as it may shed some light on how corporate America thinks the trade war will affect their economic outlook. This bit of information could be the missing piece of the puzzle. Market expectations for the ISM data are pessimistic, however, expectations may not necessarily reflect reality. If the prospects of US businesses only worsen by a small margin, then Trump’s tariff policies could be considered a success. This scenario would also lead to the dollar strengthening further.
Sincerely,
Laszlo | Market Analyst
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