Asia AM Digest: GBP Down as Trump Eyes UK for Next Trade Spat

2018-07-12 23:30:00

Daniel Dubrovsky, Contributing Senior Strategist

What's on this page

US Session Developments – Stocks Recover, JPY Falls. Powell Speaks
Current Developments – Trump Targets UK for Next Trade Threat, GBP Down
Five Things Traders are Reading:

We recently released our 3Q forecasts for the British Pound in the DailyFX Trading Guides page

US Session Developments – Stocks Recover, JPY Falls. Powell Speaks

Anti-risk currencies like the Japanese Yen and Swiss Franc underperformed on Thursday amidst a broad recovery in stocks around the world. Just a day ago, the opposite was true as the US pushed ahead with listing an additional $200b in Chinese import tariffs due to retaliation from the latter nation. Those fears died down today as China alluded to restarting stalled negotiations rather than pressing for quantitative measures.

BACKGROUND: A Brief History of Trade Wars, 1900-Present

Not surprisingly, sentiment-sensitive currencies such as the Australian and New Zealand Dollars rose at the expense of their haven counterparts. Fueling their momentum was the S&P 500 rising to achieve its highest close since early February. It won’t be much longer now until the index manages to reverse its declines from that tumultuous month where stronger wage gains fueled a panic in stocks.

The US Dollar had a rather mixed day. The improvement in risk trends dampened demand for the greenback given its status as the world’s reserve currency. That trait helped push it aggressively higher yesterday. US headline inflation clocking in at 2.9% y/y in June as expected failed to offer upside momentum given the focus in markets on sentiment.

We also had some commentary from a couple of Fed officials. Notably, Chair Jerome Powell spoke and said that the economy is in a good place, but that the inflation goal is not fully reached yet. Mr. Powell acknowledged the rising concerns about trade policy effects, adding that sustained high tariffs could be negative for the economy. Fed’s Patrick Harker also noted that those levies could sap business confidence and investment.

Additional Comments from Fed Chair Jerome Powell:

Tax cuts, spending to support the economy for a few years
Seen very gradual move up in wages
Don’t know economic impact yet of trade actions
Very pleased with results of gradual rate hikes
Relatively low US labor force participation ‘not good’
We are not declaring victory on reaching inflation goal
Falling trade barriers have served the world, US well

Current Developments – Trump Targets UK for Next Trade Threat, GBP Down

Early into Friday’s trading session, the British Pound fell against its major counterparts as the US President aimed his next trade threat at the United Kingdom. Donald Trump warned Prime Minister Theresa May that her soft Brexit plan would ‘kill’ any future trade deals. The Us Dollar was quick to take advantage of Sterling weakness, heading cautiously higher.

Meanwhile, the New Zealand Dollar, partially weaker on the higher greenback, edged even more so cautiously lower when local business manufacturing PMI underwhelmed. In New Zealand, that reading fell to 52.8 in June from 54.4 in May. That was the weakest reading since December 2017, making it a new 2018 low.

Signs that the world’s largest economies can reach an agreement that results in smaller chances of additional tariffs stand to bode well for stocks. While sentiment may continue improving, the threat of a sudden revive in trade spats still hangs over the markets and risks sparking another brief panic. As such, currencies like the Japanese Yen and Australian Dollars may be vulnerable to volatility.

DailyFX Economic Calendar: Asia Pacific (all times in GMT)

DailyFX Webinar Calendar – CLICK HERE to register (all times in GMT)

IG Client Sentiment Index Chart of the Day: AUD/USD

CLICK HERE to learn more about the IG Client Sentiment Index

Retail trader data shows 63.3% of AUD/USD traders are net-long with the ratio of traders long to short at 1.73 to 1. In fact, traders have remained net-long since Jun 05 when AUD/USD traded near 0.75729; price has moved 2.1% lower since then. The number of traders net-long is 2.9% lower than yesterday and 7.8% lower from last week, while the number of traders net-short is 6.9% higher than yesterday and 1.6% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse higher despite the fact traders remain net-long.