Insights on Finance Trends and Strategies

EU Trade Truce - July 30, 2018

By: Tony Valente Jul 30, 2018 12:13:25 PM

 


 Weekly Market Dispatch

EU Trade Truce

1. Finviz

 Two Fridays ago, on the eve of a G20 Finance Ministers meeting in Argentina, there was widespread fear that President Trump’s trade war was moving in the direction of a currency war.  The catalyst was, by way of Twitter, a tweet accusing China and the EU of manipulating their currencies while complaining that a rising US dollar was hurting the US.  This tweet caused the USD to weaken the most in four months as investors feared that the President was embarking on a new tack of jawboning the USD down to boost exports.

2.Trump's Tweet

At the G20 meeting, US Treasury Steven Mnuchin seemed to ease concerns of any shift in currency policy, reiterating in a press conference early Saturday that America’s longstanding commitment to a strong dollar remained intact.  However, in the final communique at the close of the summit, pledges made by G20 member nations in their March statement to refrain from competitive devaluations were removed from the draft statement.  That statement was replaced with - We reaffirm our exchange rate commitments made in March.  Play on words – maybe, but why make the change?  To me, the change in wording signals that global currency war just got an official blessing. 

The big showdown between President Trump and Jean-Claude Juncker, the President of the European Commission, took place on Wednesday.  Perhaps Trump’s tweet about manipulating currencies was strategic – meant to force the EU in trade negotiations.  If this is so, then it failed miserably.  The EU obtained a trade tariffs truce from the US by offering to buy more American soybeans, liquid natural gas (LNG), and to working to eliminate tariffs on industrial goods.  In exchange, the President agreed to not impose any new tariffs, especially on EU cars which Trump has repeatedly threatened, as long as trade negotiations on a free-trade agreement between the US and Europe remained in progress.

However, below the surface, these concessions by the EU weren’t particularly taxing since the EU was willing to do these anyway or was already in the process of doing them.  For instance, because China was boycotting American soybeans that meant that they were buying them elsewhere, which in turn was squeezing out other buyers.  This meant that those other buyers would have to switch to American farmers.  The promise to buy more LNG wasn’t the actual promise – the EU actually promised to build liquefied natural gas platforms which in turn would lead to more purchases of LNG from any country.  Lastly, the EU commitment of working to eliminate tariffs on industrial goods was an offer previously made to the Obama administration as part of negotiations on the now-defunct Transatlantic Trade and Investment Partnership (TTIP).  As an aside, it took five years for Canada to ink a free trade deal with the EU – did the EU just buy a 5-year tariff truce.

As for the currencies, the USD failed to push higher on the week despite the US posting GDP growth to a 4.1% in the second quarter, the fastest since 2014.  For whatever reason the US dollar index hasn’t been able to push through the 95 level and has been turned back four times, which is a bearish sign.

 

3. USD

As for the euro, it has traded in a mirror image of the dollar index, trapped in a 3 cent trading range between 1.15 and 1.18.  The euro happened to be the worst performing currency on the week, despite Trump’s tweet, as the ECB spelled out, in no uncertain terms, that their first interest rate hike will not come until after the summer of 2019.

 

4. EUR  

Next week there are central bank announcements for India, the Czech Republic, Sri Lanka, Brazil, and Mexico – but the more important announcements will be for The Federal Reserve, Bank of England, and Bank of Japan.  No change in policy is expected by the Fed, especially since they just raised rates at their last meeting and are committed to gradual rate hikes.  For the UK, the falling GBP could use some supporting action since it has been falling for the better part of 15 weeks.  However, with risk of a hard Brexit continuing to mount, we doubt that a lone BOE rate hike will be enough to turn the tide.  

5. GBP

The central bank which is most likely to tweak its monetary policy is the Bank of Japan.  The BOJ is so deep into monetary stimulus that any tweak could be misinterpreted as a step toward normalisation which would send the yen soaring.  For this reason, this meeting has the potential to be a market moving event.  This is especially important considering that the USD/JPY rate is currently sitting on a potential trend line breakdown which could send the rate back to the 105 level.

 

6. JPY

For the Canadians in the room, the CAD was the best performing currency last week as the currency made a six week high.  There wasn’t much market moving Canadian data last week so most of the gains were made on the notion that a breakthrough in the EU-U.S trade war would extend into some kind of agreement with Canada as well.  This of course remains to be seen, especially since Trump has hinted that a deal with Mexico may come first.  Trump isn’t about to forget Prime Minister Justin Trudeau’s grandstand against him at the recent G7 meeting in order to win political points at home.  Because of this transgression, a trade deal with Canada no longer seems to be on the front burner.  Be that as it may, the CAD looks poised to make more gains after breaking the trend line going back to mid-April and could revisit the 1.28 level.

 

7.CAD

Please note, there may be a trade truce for the EU but the trade war with China is still raging. 

 

       Key Data Releases This Week 

      Forecast Previous
MONDAY, JULY 30
21:00
NZD
 ANZ Business Confidence    -39.0
 Tentative   JPY BOJ Outlook    
Tentative   JPY BOJ Policy Rate -0.10% -0.10%
Tentative   JPY Monetary Policy Statement    
TUESDAY, JULY 31
12:30   JPY BOJ Press Conference    
04:30   CAD GDP m/m  0.3% 0.1%
21:30    USD CB Consumer Confidence  126.5  126.4
     NZD Employment Change q/q 0.4% 0.6%
     NZD Unemployment rate 4.4% 4.4%
WEDNESDAY, AUGUST 1
04:30   GBP Manufacturing PMI 54.2 54.2
08:30   USD ADP Non-Farm Employment Change 186K 177K
10:00   USD ISM Non-Manufacturing PMI  59.4  60.2
10:30   USD Crude Oil Inventories   -6.1M
21:30   USD FOMC Statement    
    USD Federal Funds Rate <2.00% <2.00%
    AUD Trade Balance    
THURSDAY, AUGUST 2
04.30   GBP Construction PMI 52.9  53.1
07:00   GBP BOE Inflation Report    
    GBP MPC Official Bank Rate Votes 8-0-1 3-0-6
    GBP Monetary Policy Summary    
    GBP Official Banks Rate 0.75% 0.50%
07:30   GBP BOE Gov Carney Speaks    
21:30   AUD Retail Sales m/m 0.3% 0.4%
FRIDAY, AUGUST 3
04:30   GBP Service PMI 54.7 55.1
 08:30   CAD  Trade Balance  -2.3B -2.8B
    USD Average Hourly Rate m/m  0.3%  0.2%
    USD Non-Farm Employment Change 193K 213K
    USD Unemployment Rate 3.9% 4.0%
10:00   USD ISM Non-Manufacturing PMI 58.7 59.1

 

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TONY VALENTE
Senior FX Dealer,
Global Treasury Solutions
                    

Topics: Trends, Analytics, Currency Market Trends

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