FX & Futures Analysis by Earn2Trade September 18, 2018

Ten Percent

As per yesterday’s predictions, the US government raised tariffs by 10% on 200 billion dollars worth of Chinese imports. In his announcement Trump added that if China were to retaliate in a way that harms Us interests, he would move forward with the next phase of his tariff plan. Doing so would affect an additional 267 billion dollars worth of products. China responded by saying these measures will sour future negotiations between the two countries and also touched on the possibility of retaliatory action. This latest iterations of the tariff plan will go into effect on September 24 and the tariffs themselves are projected to increase from 10% to 25% before the end of the year. The adjustment period is meant to give US companies a chance to form new business relations and find alternate suppliers, reducing uncertainty. In the end Trump did not back down and pressure on the markets will continue to increase.

China on the Rise

Buy the rumor, sell the fact, goes the old trading adage. Yesterday, Asian markets did the exact opposite, selling the rumor and buying the fact. Trump’s announcement gave the stock market the necessary boost to break out from the pressure it was previously under. Prior speculation has now been confirmed as fact, bringing a great deal of clarity to the market. The Shanghai Composite surged upwards by an impressive 1.82% as did Hang Seng and KOSPI to a lesser extent. The price of oil on the other hand decreased, being unable to rise above 70 dollars. WTI is currently around 68.70. The Chinese yuan also weakened by 6% against the USD, raising the possibility that the effectiveness of the US government’s measures could be undermined by the dollar’s continued strengthening.

S&P 500

There was a bit of fluctuation in the S&P’s rise due to the tariff announcement. Yesterday’s 0.56% drop does not appear to be panic selling as much as investors reducing their market exposure. While escalation of trade tension did not take investors by surprise, it didn’t give them cause for celebration either. Compared to the Nasdaq and Russell’s 1.43% and 1% respective decline, the S&P’s mild drop is a testament to the index’s size & diversity breaking its fall.

A decline is still a decline, however, the low volatility compared to other indices still works in its favor by reducing risk. Right now the only remaining question is China’s response, although based on prior reports they will likely not back down. The market’s primary concern right now is that the high stakes may force China to take drastic measures. In addition to the economic front, there’s also a growing political polarization over questions of Iran and Taiwan among other things, which in the end could undermine the USA’s global influence. Meanwhile the index is still close to its peak and its current growth seems sustainable over the long term. For investors to be concerned, price would have to move below 2864. To do so it would have to fall below the 200-period moving average and break the persistent support line that’s been keeping price stable since late August.

AUDUSD

The US dollar’s reaction to Trump’s tariffs has been mixed. Based on the experiences of the past few months, there should have been an influx traders exchanging other currencies for dollars, which was absent this time around. This could potentially be an indicator of the USD’s strengthening starting to wind down.

Looking at the AUDUSD pair over the course of September, it’s difficult to claim that the USD is on a definitive upwards trend. The chart reveals more of a sideways ranging pattern between 0.7145 and 0.7228. Price has left this range on one occasion, breaking out downwards only to run into a powerful support line quickly after, that caused it to return to its original range. This kind of movement could also be interpreted as a sign of an impending trend reversal. The US dollar’s weakening could amplify the effect of the tariffs, making it an attractive tool for US economic policy. Even if the USD doesn’t weaken significantly, simply remaining unchanged is enough for the US to benefit.

Sincerely,
Laszlo | Market Analyst

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