US Trade Balance
US trade deficit has increased further. Trump’s attempts to improve trade balance have not been successful so for, likely in large part due to the dollar’s strengthening. Trade deficit has risen above 50 billion dollars, the highest figure on record since February. The 9.5% increase from June to July can be attributed to exports dropping by 1% and imports rising by a comparable amount. Exports to the European Unions declined by 15.7%, which signals major changes in trade relations Imports from China on the other hand increased by 5.6% while US exports to China declined by 7.7%. The result is trade deficit with China reacting the record amount of 36.8 billion dollars.
Asia in the Negative
Following the decline of US indices it’s no surprise that sellers dominated the Asian trading session as well. Australia and Hong Kong led the losses, suffering a 1% decline each. The Shanghai Composite and the Nikkei also declined by approximately 0.5%. In other news the South African rand’s weakening accelerated due to the dollar’s rising momentum. Same goes for the Turkish lira, which was affected by the country going ahead with the construction of infrastructure necessary to receive Russian missiles.
Copper
The ongoing trade war has considerably worsened copper’s market outlook this year. In addition to market forecasts suggesting demand for copper will stagnate, the USD’s strengthening puts additional pressure on its price. There’s no doubt copper is on a downwards trajectory, however, recently its decline has become more gradual.
The price timeline can be divided into two distinctly different periods. The time span marked by the yellow rectangle is characterized by the predominance of of sellers and a steep decline. After the 2.85 line broke it instead took on a pattern of ranging sideways movement. This is a clear indicator of buyers returning and balancing out the market. Price seems to have settled on a sustainable 0.15 dollar range for a month and a half. Price left this range around mid August, moving into another parallel lane between a lower limit of 2.5580 and the previously broken line of 2.70 serving as the new upper limit. This gives the impression that copper prefers to move in 0.15 dollar increments and the new range was confirmed when price retested the new support line. Assuming this incremental movement is a valid trend, if the 2.55 line breaks, the next support would be found at 2.40. This information will prove useful regardless of which direction price will go.
USDJPY
A close inspection of yesterday’s US trade balance figures reveals interesting changes in trade relations between the US and its partners. China, the European Union and Canada all reduced their US imports following the enactment of Trump’s tariffs. On the other hand the US increased its exports to Mexico and Japan. In the latter case Japan imports 2% more US goods while exporting 2.4% more products to the US. At the very least this relationship remains unchanged.
The question is whether this can be attributed to the two countries’ amicable political relationship or the Japanese yen maintaining a stable value against the dollar. It also raises the question of whether these two factors are linked and the two countries’ good relationship is in fact the underlying reason for the yen’s stability. Nonetheless, the Bank of Japan (BoJ) has been pursuing a policy of active market intervention appearing as a buyer of several assets, including the yen itself. This makes it entirely possible that the BoJ has a hand in propping up the USDJPY exchange rate. This type of currency manipulation results in a level of stability that even the US can benefit from. Neither China nor the EU intervene in the currency market as actively as Japan, causing their currencies to weaken against the yen due to increasing difference in their respective interest rates, yet these are the countries Trump accuses of manipulation. In truth it seems countries not actively intervening against the dollar’s strengthening are enjoying the benefits and seeing their competitiveness against the US increase, while Japan chose to maintain good relations with Washington by not taking advantage of it.
Sincerely,
Laszlo | Market Analyst
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