Risk sentiment deteriorates amid escalating trade tensions

With the ECB and Fed meetings in the rear mirror, investors switch attention to the trade war between the US and China. On Monday morning, safe havens assets, such as the Japanese yen and Swiss franc, were better bid, while the greenback extended gains against most its peers. The single currencies currency continued to suffer from the ECB’s decision to hold rate until the end of summer 2019, at least. After falling more than 2% last week, the single currency stabilised around 1.1580.

USD/CHF treaded water around 0.9975, while USD/JPY fell 0.13% to 110.53. AUD/USD is approaching the key $0.7412 support (low from May 9th 2018). A break of the later support would open the road towards the next one that lies at $0.7329 (low from May 9th 2017). Over the past two weeks, the Australian dollar has suffered greatly from escalading trade tensions between China and the US as could dampen significantly Australia’s economic outlook. Indeed, as an open economy that relies heavily on exports, a global trade war could have dramatic consequences; especially should the situation between the US and China – Australia’s biggest trade partner – spirals further.

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Japan exports rise despite trade tensions

Regardless of the current trade tension situation, the Japanese economy manages to maintain steady exports growth for four consecutive months. Estimated at 8.10% y/y in May, Japan exports moderate growth does not show clear signs of trade tensions so far, with Food (+25.70%), Raw Materials (+13.50%), Minerals (+33.60%) and Chemicals (+12.50%) being the largest contributors. In spite of intensifying retaliatory threat measures between its key partners, Japan’s exports towards China and the US rose by +8.60% and +16.80% respectively, a rather good news for Prime Minister Shinzo Abe who’s been striving for tighter relationships with both nations.

Due to increasing domestic demand in the country, we would consider to treat May adjusted trade balance data with sensitivity. Indeed, given at JPY -296.8 billion (USD -2.73 billion), a major decrease after JPY +453.94 billion (USD +4.16 billion) in prior month, May trade balance is essentially explained by recent unusual import numbers, strongly boosted by oil, aircraft and pharmaceutical product imports.

Accordingly, recent trade data are suggesting a rather decent growth trend for the world largest economies, supported by strong domestic consumption. On Japanese side, we expect a rapid bilateral trade resolution with the US and continued healthy trade relation with China.

Currently trading at 110.54, the USD/JPY is gaining strength, approaching the 110.80 range and expected to progress further since recent bounce from 109.92 (14/06/2018 low).

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