FX Week Ahead - Top 5 Events: July US Trade Balance & USD/CNH Rate Forecast
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US Trade Balance Report Overview
- The revised July US advanced goods trade balance is due on Thursday, August 29 at 12:30 GMT and the data will only likely enflame the US-China trade war.
- Meanwhile, the August Chinese Manufacturing PMI is set to remain below 50, a sign that the sector continues to contract.
- USDCNH has continued to maintain its elevation above the crucial 7.0000 exchange rate, and a further escalation in the US-China trade war could push USDCNH up towards 7.3000.
Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.
08/29 THURSDAY | 12:30 GMT | USD Advanced Goods Trade Balance (JUL)
On Thursday, US trade figures for July will show that the US has its largest trade deficit ever, another development surely to displease US President Donald Trump and his administration's trade representatives.On Saturday, the Chinese Manufacturing PMI reading is due to show that the manufacturing sector remained in contraction with the index due below 50. The fact of the matter is that US consumers are buying few products from Chinese producers, raising the costs of goods in the US and reducing economic activity in China.
With the latest twists and turns in the US-China trade war, it seems likely that expectations for any sort of substantive agreement between the US and China in the coming weeks are low; and traders should obviously expect some retaliation by US President Trump.
Pairs to Watch: DXY Index, EURUSD, USDJPY, USDCNH
USDCNH Technical Analysis: Daily Price Chart (August 2018 to August 2019) (Chart 1)
Per the our last USDCNH technical forecast update, the threat of escalation in the US-China trade war directly threatens USDCNH insofar as Chinese officials are now aggressively using the Chinese Yuan as a policy tool. To this end, nothing has changed:
“Moving forward, the threat of stepping up the Trump tariffs from 10% to 25% on $300 billion of goods would mean that markets need to factor in the remaining 15% of the tariffs; Chinese economic activity will decline by approximately $45 billion at this rate. To offset a potential $45 billion in lost trade, then the Chinese Yuan will need to lose another 3% from where it closed on Monday, August 5.
Accordingly, the Trump tariffs at 10% on $300 billion of goods have provoked a near-2% depreciation by the Chinese Yuan, as would be expected if Chinese officials were using the Yuan to offset potential negative economic impacts.
If Trump steps up the latest round of tariffs from 10% to 25%, the Chinese Yuan will require another 3% depreciation from its close on Friday, August 2 to offset the increased tariffs; total depreciation needed by the Chinese Yuan to fully offset the 25% tariffs on $300 billion of goods is 5% from where it closed on Thursday/opened on [Friday, August 2].
As such, USDCNH should hit at least 7.3022 if US President Trump escalates the trade war further by increasing the tariff to 25% on $300 billion of Chinese goods.”
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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