Rates: US imposes new tariffs; markets react calm
US President Trump announced a 10% tariff on $200bn of Chinese goods. Markets react subdued as the move was anticipated and discounted. The US 10-yr yield remains near 3% resistance. Today’s eco calendar is thin. Investors will further digest Trump’s action and await a Chinese response. We expect technically-driven trading.
Currencies: US dollar doesn’t profit from an ‘escalation’ in US/China trade war.
Yesterday, EUR/USD held remarkably strong even as markets were preparing for a further escalation in the US-China trade war. Overnight the US indeed imposed additional tariffs. However, the impact on global (FX) trading remains very modest. EUR/USD shows ongoing resilience. The EUR/USD 1.1733/91 resistance remains on the radar
The Sunrise Headlines
- US markets closed yesterday’s trading day lower with NASDAQ(-1.43%) underperforming the bunch. Asian equity markets opened mixed this morning, with Japan outperforming. China holds strong despite new tariffs by the US.
- US President Trump has confirmed he will impose a 10% tariff on about $200bn of Chinese imports. He threatened to increase the rate to a 25% tariff by next year if no trade deal was reached. China already vowed to retaliate.
- South Korean leader Moon Jae-in has arrived in Pyongyang this morning to meet North Korean leader Kim Jong Un for a three-day summit. The pair will discuss Korean relationships and Kim’s vow to the US for denuclearization.
- Argentina’s Minister of Treasury has presented his plan in Congress to achieve a fiscal balance next year with the 2019 budget. In the meantime, Argentina is making progress with the IMF to strengthen its $50bn credit line.
- Hilary Benn, head of UK parliament’s Brexit committee, does not agree with Prime Minister May that the only alternative for her Chequers plan is that the UK will leave without a deal. She said the government should have a back-up.
- Canadian Foreign Minister Freeland has said she will return to Washington this week to start a new round of trade talks with the US. They are running out of time to negotiate a new Nafta deal, as the US demands a deal by October 1st.
- Today’s US eco calendar is again very thin with no basically no eco data. In Paris, ECB governor Draghi is expected to speech, as well as his colleagues Villeroy and Nouy.
Currencies: US Dollar Doesn’t Profit From An ‘Escalation’ In US/China Trade War.
USD doesn’t gain as trade war moves to next stage
On Monday, markets were looking out for the US announcing a new wave of tariffs on Chinese imports. However, this potential escalation in the trade war had only a modest impact on global markets, in particular on the dollar. An EUR/USD downside test was rejected and the pair started a steady rebound from 1.1620/30 to the high 1.16 area. European equities also largely ignored the trade risk. Ongoing positive headlines from Italy proably supported the outperformance of European assets. At the same time, the decline of the tradeweighted USD also suggested dollar softness. The new tariffs were ‘preannounced’ (Kudlow) during the US session and officially announced overnight. EUR/USD closed the session at 1.1683 (from 1.1625). USD/JPY finished at 111.85. Overnight, Asian equities are trading mixed. The reaction to the new US tariffs is muted, including on Chinese markets. The dollar remains in the defensive. The trade-weighted dollar hovers near recent lows. EUR/USD is again testing the 1.17 area, confirming yesterday’s good performance. USD/JPY stabilizes near 112. This doesn’t look like an outright risk-off reaction on FX markets. Most EM currencies also react moderately. USD/CNY is holding recent ranges. There are hardly any data in Europe or in the US today. So, the fall-out from the new US import tariffs will be the major driver for global FX trading. Contrary to what was often the case of late, the dollar apparently tends to become less of a beneficiary of the China-US trade war. The jury is still out, but we are keen to seen the reaction of the dollar in case of Chinese retaliation. It is not sure that this will support the dollar. We tend to become more neutral on EUR/USD in a daily perspective. The 1.1733/50/91 resistance is the first topside reference. A break won’t be evident, but we are becoming more alert for a move in that direction.
Yesterday, EUR/GBP trading was mostly driven by technical factors as the news flow on Brexit remained rather mixed/diffuse. Sterling finally gained a few ticks. EUR/GBP closed the session at 0.8878. Today, there are again no important UK eco data. So the sterling trading dynamics could be quite similar to yesterday. Of late, sentiment on sterling turned less negative as markets saw tentative signs of an improvement in the UK-EU negotiatons. For now, we don’t expect the move to go very far as long as there is no clear indication that PM May will receive enough political backing within her own party.
EUR/USD: 1.1733/91 resistance remains within reach