One Week Left
There’s only one week left until the initial 25% US tariffs go into effect on September 5. This plan will affect 200 billion dollars worth of Chinese imports with higher tariffs. China and the US have been engaged in high-level negotiations on matters of trade, however, they have not yet come to a consensus. At this point it seems both parties are sticking to their guns on the issue and the tariff plan will proceed without regard for its economic victims.
In truth the past few months have not been finding a compromise so much as the two global powers strengthening their respective lines of defense. The USA’s agreement with Mexico will no doubt help support the country’s economy in the coming dispute, however, Donald Trump’s various alleged scandals may give the President less room to maneuver. China is also taking precautions by managing the price fluctuation of the yuan and preparing a 150 billion dollar plan to stimulate its domestic market. Unless the two heads of state have a sudden change of heart, the trade war will soon begin in earnest.
Anticipation
Keeping with trends from earlier this week, today’s defining strategy on the stock markets was to wait and see. Most major Asian indices experienced a small increase, with the exception of the SHanghai Composite, which declined by 0.3%. European indices are also carefully inching upwards as are US indices as well. The last week of summer will likely act as the calm before the storm.
Precious metals and oil on the other hand have been on the decline, possibly due to the USD’s recent strengthening.
AUDUSD
Australian politics seems content with the current state of tranquility it has found itself in. The period between the government crisis and the forming of the new cabinet is one of quiet anticipation. On the other hand the reduced governmental decision-making ability also means they’re more vulnerable to the flow of the global currency market, causing the AUD to drift along the waves made by the USD.
The chart clearly illustrates how the price’s range of movement has been continuously narrowing as the candles dance around the slow moving 200-period moving average. This constellation is typical of periods when the market is biding its time, including the difficulty of finding specific lines of support and resistance as well as a moving average that does not impede price movement. The weakening of the Australian dollar also has the effect of tampering the dropping of prices in the commodities market, however, a continued decline could lead to rising inflation. Given that there are no plans for an upcoming interest rate hike and that China’s economic growth is at a substantial risk of slowing down, the more probable outcome for the narrowing price range would be a downwards break out.
Silver
The overwhelming surplus in the supply of money circulating in the global economy over the past 10 years has naturally lead to drops in the price of several commodities, showcasing the importance speculation had played in their respective prices. The easy access to additional funds also magnified the scale of speculative capital, resulting in capital being pulled from certain segments of the commodities market and instead reallocated into the more low risk market of stocks and bonds.
Futures traders have no choice, but to price in changes in the value of the dollar as one of their risk factors. This is also the root of the US dollar’s hegemony, which a number of countries have unsuccessfully attempted to break. China’s yuan based oil contracts failed to produce the desired results, while other countries efforts only served to push them towards a peripheral state. Naturally, this means the price of precious metals continues to be heavily dependent on the decisions of the US government and by extension, the Fed. The price of silver has been dropping at the same pace as the US dollar strengthens and since the breaking of the 12.645 support line it has become clear that given current global liquidity, an increase in price would only be possible if and when the dollar weakens.
Sincerely,
Laszlo | Market Analyst
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