Risk Assets Suffer Amid Prolonged and Worsening Trade Tensions. Are You Prepared for the Week Ahead?
Market Analysis - AxiTrader Team | 03 Jun 2019
- China released White Paper says latest U.S. tariffs won’t fix trade issues
- Safe haven JPY is still favored by investors as prolonged trade tensions and tariffs are hurting global supply chain
- China’s manufacturing PMI due next week could be negative news as data set to be back in contraction territories due to trade tensions (this would affect commodity currencies)
- ISM Manufacturing PMI – potential slowdown in May due to shrinking domestic exports and consumption weakness, which could put USD on pressure
- Fed Chair Powell Speaks – Potential switch of stance from neutral to dovish as trade tariffs are hurting U.S. consumer and business confidence
- Non-Farm Employment Change – the market is expecting 180k increase in the number of employed people during the previous month, excluding the farming industry, slightly down from April’s 263K
FUNDAMENTAL ANALYSIS ON USD
Haven currency USD has continued to rise this week amid escalating trade tensions. Risky assets, including equity market and commodity currencies, tumbled, and U.S. Treasury yield curve inverts again. One reason behind the USD rally is that U.S. Treasury yields are still higher compared to other G10 countries and U.S. economy data prints performed better than its peers. However, as the trade tariffs are affecting U.S. consumption, the market is anticipating the Fed to change its stance to dovish. As the U.S. is imposing tariffs on both China and Mexico goods, the U.S. economy could suffer as these two trading partners has become increasingly integrated with American supply chains. This price rise in materials and products could curb consumer and business confidence.
Moving forward, USD will have a data busy week as the ISM manufacturing is due today. Wednesday Powell’s speech will be on focus and Friday will release the latest Non-farm payroll number. USD could tick lower as the market is gauging the harm trade war has put on the U.S. economy while possible data printing downside surprise could also drag USD down.
- BOJ Gov Kuroda Speaks – The volatility can be seen in the market as audience questions are also expected
- Average Cash Earnings y/y - Potential upside surprise is good for currency
- Household Spending y/y - Potential upside surprise shows robust economic growth
FUNDAMENTAL ANALYSIS ON JPY
JPY extend gains to a five-month high as the escalation of the trade war and its likely impact on the global economy draws demand for haven assets. Risk assets, including equity market and commodity currencies, continued to tumble. U.S. 10-year treasury yield dropped to a new low. Beijing released a white paper on Sunday saying the escalating trade war between the world’s two largest economies hasn’t “made America great again” -- appropriating Trump’s 2016 campaign slogan. China’s government says it’s willing to work with the U.S. to end an escalating trade war but blames President Donald Trump’s administration for the collapse in talks and won’t be pressured into concessions.“It is foreseeable that the latest U.S. tariff hikes on China, far from resolving issues, will only make things worse for all sides,” according to the white paper.
Moving forward, JPY movement will still be dominated by trade progress. According to the white paper, the prerequisite for a trade deal is that the U.S. should remove all additional tariffs, China’s purchases of goods from the U.S. should be realistic. This doesn’t seem possible given Trump’s tendency to spread the trade war front to Mexico and India with tariffs as a weapon. If the trade war continues to last longer, the market will start to price on more downside risk of economic growth, which would further benefit JPY.
KEY TECHNICAL LEVELS ON USDJPY
USDJPY is dropping strongly with a key breakout level identified at 108.54. The next support is at 107.33 to 106.92 which is a 100% FIbonacci extension and also a major swing low support. Price has now crossed below the Ichimoku cloud which the market usually interprets as it gaining bearish momentum.
PRICE JOURNEY ON USDJPY
Based on PsyQuation, USDJPY started the day weak dropping to losses of almost -0.1%.
What does this mean?
Such price journey movements where price drops initially before making a small recovery to the upside before finally collapsing, is commonly seen in markets where the bears are overpowering the bulls despite their resistance.
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