FX & Futures Analysis by Earn2Trade August 14, 2018

ZTE, Huawei

The US-China trade dispute entered a new stage yesterday, when Donald Trump enacted sanctions against two Chinees tech companies. His administartion justified the sanctions against ZTE and Huawei by claiming their devices pose a national security risk as they could be used to spy on the US nationals. Canadian steel and German cars are also subject to higher tariffs for allegedly similar reasons. Whether all of these are actual threats to national security or merely a justification for the administration’s economic policy remains to be seen.

Another development in this ongoing conflict was the US expressing the intent to continue its close military cooperation with Taiwan, much to the chagrin of the Beijing government. To this end the House and Senate voted for a $716 billion military spending bill.

The Lira Recovers

Turkey’s economic issues has become the center of attention for many investors, so it’s no surprise that the lira strengthening by 7% had a positive effect on global markets. The uncertainty surrounding the country has not cleared up yet, however, the Ankara government’s efforts to prevent the situation from spiraling out of control seem to be having an effect. If anything, the Nikkei’s 2.28% increase is a welcome sign, despite Chinese indices continuing to decline.
Meanwhile cryptocurrencies are on the brink of collapse. Bitcoin fell below $6000 and others also lost approximately 7-8% in value. Gold also seems to be having a hard time, hovering around its yearly low at $1200. It seems that the world’s oldest currency and the newest both fail at holding investor interest right now.

USDJPY

The Japanese yen continues to act as Asia’s safe haven currency, showing remarkable stability against the US dollar. The USD’s strengthening trend has defined the direction of all other major currency pairs.The USDJPY consistently remained within its 106-114 range for the last four months while both the euro and pound are approaching their yearly lows. Japan’s exceptionally cautious foreign policy has found a delicate balance between China, Europe and the US, making the country a bastion of stability. Though US tariff policies have in many cases affected Japan negatively, Prime Minister Shinzo Abe’s composed handling of the matter prevented Japan from being targeted with tariffs by any of the parties involved. This allowed them to sign a bilateral trade agreement with Washington while at the same time reaping the benefits of China lowering its own trade barriers.

The main hurdles Japanese politicians have had to face for several decades were low inflation and the strengthening of the yen. The Bank of Japan (BoJ) has been pursuing an active intervention policy and spent the equivalent of a small European country’s GDP to try and weaken the yen by buying up bonds and corporate stocks. This mirrors the policies of Switzerland when they were trying to maintain the franc’s 1.2 price against the euro. The central bank taking such an active role acted as assurance to both traders and investors, since they could decide if their positions were with or against the Swiss National Bank (SNB).

While Switzerland specifically defined their target price level, the BoJ has been much more careful in their efforts. By not specifying an exact price goal, they’ve allowed themselves some wiggle room in their policy without having to fear the kind of blowback the SNB suffered when easing their monetary policy. The chart suggests the current line is between 114-115 so when the dollar strengthens the yen needs to strengthen as well to reduce the possibility of arbitrage.

USDCAD

Despite political relations between the US and Canada not being at their best, the two countries still walk the same road economically. Canad’s macroeconomic indicators show the country’s only one quarter behind their southern neighbor. The USA’s increasing inflation rippled over into Canada, prompting the Bank of Canada (BoC) to follow in the Fed’s footsteps in pursuing a policy of interest rate hikes. On July 25, the BoC raised the base interest rate by 25 basis points.

While the USD is on a clear upwards trend against the Canadian dollar, the the BoC’s rate hikes actually limited its increase, unlike major European currencies and peripheral currencies who were outperformed by the US dollar. The chart shows how the CAD started to strengthen before the latest BoC interest rate meeting, reaching all the way to 1.2968. At this point the USD also lost some of its earlier momentum, now unable to approach its previous 1.3386 peak from the end of June. In fact, the last attempt the USD made to rise fell short of 1.3175, making the pair form a perfect downwards wave. The main question for the pair right now is whether the CAD can gather enough momentum to tackle and possibly break the 1.2968 line, thus overcoming its weakening trend.

Sincerely,
Laszlo | Market Analyst

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