Equities shrug off trade tariff tensions

Is the negotiating table being dusted off?

Was it a storm in teacup? Equity markets across Asia shrugged off yesterday’s post-tariff announcement weakness and are trading in the black through the Asian session. Nikkei225 rose 0.95%, Australian stocks rose 0.68% and even China shares managed gains of 2.30%, recouping all of yesterday’s losses. What has caused this shift in sentiment? Well, China’s Vice Minister of Commerce, Wang Shouwen, urged his US counterparts to resolve the current conflict with a new round of bilateral negotiations. Early murmurings from the US administration could imply that they are amenable to a resumption of talks at a high level, Bloomberg reports.

A tenuous and unstable state of affairs

Currencies lag behind

Currency pairs have halted the risk-off trend started yesterday but have yet to reverse yesterday’s moves to any degree. USD/CNH is posting its first down day in three, but so far has only managed a slide of 0.59% while AUD/USD has recovered 0.28% on the day.

AUD/USD Daily Chart

Source: Oanda fxTrade

US inflation data in the headlights

Today’s data calendar is a mixed bag, with German CPI for June kicking off the European session followed by Euro-zone industrial production for May. Inflation is seen holding steady with the increase expected to be the same as May, up 0.1% m/m and up 2.1% y/y. Factory output is expected to rebound from April’s slump, seen rising 1.2% m/m and 2.1% y/y.

US June consumer prices are seen rising 0.2% m/m and 2.9% y/y while core prices, excluding food and energy are forecast to gain 0.2% m/m and 2.9% y/y. Given that the Fed has said recently that it will not overreact if prices stray above their medium target in the near term, it would require a number significantly different from estimate to provoke a meaningful market reaction.

You can access the full data calendar on MarketPulse at https://www.marketpulse.com/economic-events/

Bank of Canada hikes rates with hawkish outlook

Investors turn risk-averse on tariff war escalation

US announces list of next tariff targets

The US close was looking hunky dory, with equity markets aiming for a higher close as there appeared to be a lull in trade war rhetoric, once the first salvos had been fired last weekend. Then BOOM! Headlines that the US was set to announce the list of the next $200 billion worth of Chinese goods targeted for a 10% tariff hit the wires. Once the contents of the list were known, the sour tone intensified as a general risk-averse mood permeated through markets during the Asian session.

News reports say the list runs to more than 200 pages and refers to goods from TV components, food products, tobacco, raw materials and even badger hair! The tariffs are scheduled to be implemented after public consultations end on August 30. Bloomberg also notes that China only imports about $136 billion worth of US goods, so it could be interesting to see how countermeasures match up. The only reaction from China so far has been from the Ministry of Commerce which stated the latest round of tariffs interferes with the globalization of the world economy and harms the WTO trade order. It reiterated that cooperation is the only correct choice for US-China relations, though vowed to roll out a response.

When the going gets tough, the tough get going

Equities and yuan suffer

In reaction, the Nikkei225 fell up to 1.86% while China shares slumped as much as 2.76%, as investors once again tried to gauge the true impact on the Chinese economy and companies. In the currency space, the yen was bid, rising 0.69% versus the AUD, 0.07% versus the EUR and 0.05% against the pound. It did, however fail to gain ground against the dollar. The offshore yuan was under pressure the whole session, falling as much as 0.63% versus the dollar to hit 6.69190.

NOTE: Last time the offshore yuan weakened through 6.70, on July 3, the PBOC stepped up its comments on the tools it has to adjust policy

Aussie data ignored

Australian data releases were generally positive. The Westpac consumer confidence index jumped 3.9% in July, home loans rebounded in May, signaling the first growth in six months while home loans for investment purposes fell a less-than-expected 0.1%. The good data couldn’t help the local dollar which was caught up in the broader risk-averse trade. AUD/USD is down 0.72% at 0.7405 having failed to penetrate the 0.75 handle in the previous two sessions.

AUD/USD Daily Chart

Source: Oanda fxTrade

Bank of Canada decision on the radar

The highlight of today’s data calendar will likely be the Bank of Canada rate decision where market consensus is that the central bank will hike rates for the first time in four meetings as it seeks to close the rate gap with the Fed. Expectations are for a 25bps increase to 1.50%. The press conference will be monitored for hints on future guidance on rate trajectory. USD/CAD is currently at 1.31366.

Bank of Canada Expected to Hike on Wednesday

Other data bites include speeches from ECB’s Draghi, Praet and Mersch, US producer prices for June and wholesale inventories for May. Speeches continue later in the day with BOE’s Carney and Fed’s Bostic and Williams all on tap.

You can access the full data calendar on MarketPulse at https://www.marketpulse.com/economic-events/

Oanda Live FX Market Analysis