US-Chinese trade dispute escalates further – Equities down, Gold up?

  • master
  • 13.08.2019
  • Comments Off on US-Chinese trade dispute escalates further – Equities down, Gold up?

Economic Events of August 12 – 16, 2019

Source: Economic Events Calendar August 12 – 16, 2019 – Admiral Markets’ Forex Calendar

DAX30 CFD

As expected in our last weekly market outlook, the weekly close below 12,000 points and the EMA(200) was a first warning sign and that bears may be in a favourable position.

And in fact, after last Monday, China allowed the Yuan Renminbi to weaken past the psychologically important line of 7.00 per USD last week for the first time in 11 years, taking, as expected, counter-measures against the new imposed tariffs from US president Trump from September onwards, the trade dispute between the US and China hit a new high (especially after aggressively labelling China a currency manipulator).

While we could close the last week of trading above the SMA(200), the bullish technical picture has clear and deep cuts now and the upside seems limited, even if over the next few days, further escalations especially from US president Trump will result in emergency steps from especially the US central bank Fed.

In our opinion, such emergency steps (if taken at all) will only result in elevated volatility and choppy price action, while the device seems to be “Sell the bounce”.

Technically, the DAX30 CFD could see a re-test of the region around 12,000 points if bulls can recapture 11,800/830 points. Above 12,000 points a significant zine of resistance can be found around 12,150/200 points.

But in general the mode stays bearish and a drop below 11,250 points leaves the German index vulnerable to a drop as low as 10,800 points:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between May 2, 2018, to August 9, 2019). Accessed: August 9, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016 it increased by 6.87%, in 2017 it increased by 12.51%, in 2018 it fell by 18.26%, meaning that after five years, it was up by 10.5%.

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US Dollar

After the Fed rate decision on July 31, the situation escalated fairly quickly and volatility should be expected to stay elevated in the days to come.

After the announcement of Trump one day after the Fed, that 10% new tariffs on Chinese goods will be imposed from September (most likely as a result to get what he wants: the Fed cutting rates aggressively lower as soon as possible), China allowed the Yuan Renminbi to weaken past the psychologically important line of 7.00 per USD last week for the first time in 11 years.

And driven by the newest attacks from the White House, labelling China a currency manipulator, we expect the trade dispute between the two countries to worsen, especially since a further drop of the CNY against the US-Dollar should be expected (a potential year-end target in USD/CNH can be realistically seen around 7.30/35).

If this motivates US president Trump to further escalate steps in the trade war (e.g. ramp up tariffs instead of 10% to 25% from September onwards), resulting in an even more aggressive risk off mode in markets and expectations of an aggressive easing Fed, could result in high volatility, especially in the USD.

Given the fact that the USD Index Future basket has a weight of 58% Euro and that the Euro could see some capital inflows resulting out of Carry Trades being unwind in such a market environment, the USD Index Future could see a push lower.

On the other hand: the ECB will likely come out very dovish at her meeting on September 12, (rate cut to -0.1% and potentially a revival of her QE program in one or another way). With that in mind, any Euro rally against the USD will likely be short-lived…

So, given this mixed picture, the price action in the USD Index Future should be expected to stay choppy, especially as long as we trade between 95.00 and 98.00 points:

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between May 2016 to August 2019). Accessed: August 9, 2019, at 10:00pm GMT

Don’t forget to register for the weekly webinar “Admiral Markets’ Weekly Market Outlook” with Jens Klatt, every Friday at 12pm London time! It’s your opportunity to follow Jens as he explores the weekly market outlook in detail, so don’t miss out!

Euro

The fundamental picture the Euro hasn’t significantly changed over the last week, after a new wave of escalation in the trade war between the US and China.

Still, the EUR/USD pushed back towards 1.1200. The main reason for that seems to be an unwind of Carry Trade-financed Euro bets. And since we expect the trade dispute between the US and China to escalate further in days to come, we still consider the short-term momentum respectively advantage in the EUR/USD to be found on the upside.

On the other hand we are very sceptical if we can get to see a (sustainable) push back towards 1.1300, reason: : the ECB will likely come out very dovish at her meeting on September 12, (rate cut to -0.1% and potentially a revival of her QE program in one or another way).

With that in mind, any Euro rally against the USD will likely be short-lived and another run down to the psychological relevant and important of level around 1.1000 seems likely, with a break lower activating 1.0750 as a first potential target:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between June 11, 2018, to August 9, 2019). Accessed: August 9, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.

AUD

After the RBNZ surprisingly cut rates by 0.5% on Wednesday, not only the Kiwi Dollar, but also the Aussie dropped to new yearly lows.

The step by the RBNZ can be considered to anticipate a further escalation in the trade war, hitting especially Chinese trading partners like New Zealand (in terms of soft-commodities) and Australia (hard-commodities).

That the cut from the RBNZ can be considered an “insurance cut” can be seen in the fact that overall economic outlook for the NZ economy looks solid with employment being around its maximum sustainable level, while inflation remains within the RBNZ target range nevertheless still below 2%.

When now looking over to Australia and the RBA, the situation looks different economic wise: the two cuts by 25bp each in June and July resulted not only out of the fact that the trade war between the US and China escalated further, but also out of a run of subdued GDP annual growth prints, falling house prices and sluggish wages which negatively affected consumer spending.

That said, the outlook for the AUD stays clearly bearish, even though we consider the US dollar not necessarily the most attractive counter-currency. Due to the expected higher volatility and risk aversion in the weeks and months to come, AUD/JPY probably seems a more attractive choice.

Technically, we stay bearish on a daily time frame below 76.00/20, with pullbacks finding an attractive short-trigger around 74.00/20 targeting to anticipate a break below the January-Flash Crash lows around 70.00:

Source: Admiral Markets MT5 with MT5-SE Add-on AUD/JPY Daily chart (between May 24, 2018, to August 9, 2019). Accessed: August 9, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the AUD/JPY increased by 4.1%, in 2015, it decreased by 10.4%, in 2016, it decreased by 3.5%, in 2017, it increased by 4.0%, in 2018, it decreased by 12.1%, meaning that after five years, it was down by 17.7%.

Gold

In our last weekly market outlook we wrote

[…]Gold is especially profiting from the next round of attacks from US president Trump, (…). That said, a push higher in Gold higher with a minimum target to be found around 1,480/490 USD, probably even higher than that, is likely, especially since between the August 12 through September 5[…].

And driven by the newest attacks from the White House, labelling China a currency manipulator after China allowed the Yuan Renminbi to weaken past the psychologically important line of 7.00 per USD, we already reached our first target for the precious metal on the upside last week.

But, we consider chances high that Gold appreciate further in the days to come since a further drop of the CNY against the US-Dollar should be expected (a potential year-end target in the USD/CNH can be realistically seen around 7.30/35) with further escalating steps in the trade war being taken, especially from the US.

In addition to that fundamental driver higher in Gold, also the bullish seasonal pattern between the August 12 and September 5 should be mentioned: here, over the last 21 years, Gold saw in 16 years an average gain of 25.09 USD while in the remaining five years, Gold dropped on average only 12.40 USD, while the maximum loss was 40.68 USD and the maximum drawdown being 44.23 USD.

That said, a sustainable push above 1,500 USD in Gold seems only a question of time with the mode staying clearly bullish on a daily time-frame as long as we trade above 1,380 USD:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between May 10, 2018, to August 8, 2019). Accessed: August 8, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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