The likelihood of a short-term trade agreement between China and the US has declined, as the Trump administration is considering banning the sale of US technology to a large number of Chinese companies. In turn, Beijing refuses to resume negotiations when such threats arise. The head of the Federal Reserve Bank of Dallas, Robert Kaplan, said that China could devalue its currency in order to smooth the impact of higher US trade duties. However, is it beneficial for China?
Most likely, concerns about a significant devaluation of the RMB as one of the retaliatory measures are exaggerated. Of course, such a move can mitigate the effects of higher tariffs for exporters, but it can bring even more problems than benefits. The People's Bank of China (NBK) has already made certain changes to the yuan market value formula when the first tariff increase from 10% to 25% occurred and both deputy heads of the NBK Liu Guoqiang and Pan Gunshen recently spoke publicly, promising a stable yuan.
There are other reasons not to assume a weakening of the yuan, particularly the likelihood of growing internal panic and capital outflows, which in the end could provoke a financial crisis and weaken the fundamental indicators of the Chinese economy. A weaker currency will undermine China's efforts to internationalize the yuan, which is clearly not in the plans of the country's leadership.
Thus, China's response will most likely be selective, which will not be detrimental to exports. As a result, stable exports also mean stable imports, which gives some support to the main suppliers of raw materials to China, including Australia and New Zealand.
AUD/USD pair
Signals from the RBA indicate the regulator's willingness to cut the rate by a quarter percent at the next meeting in June. This forecast is generally supported by markets that focus on expanding the yield spread in favor of the USD, which makes it possible to predict a decrease in the AUD against the dollar over the coming weeks.
At the same time, the main macroeconomic indicators are far from being considered negative. The growth rate of wages in Q1 of 2.3% y/y is quite sufficient to count on price increases, as well as trade balance and current account surplus. The PMI in the manufacturing sector is surely above 50p and GDP growth rates do not give rise to fears of a recession.
The main factor that can lead to a decrease in the RBA rate is low inflation. Very low rates of construction and a weak housing market require lower mortgage rates. Moreover, if housing prices stabilize, then after some delay inflation may begin to stabilize. In turn, this will reduce the threat of a rate cut.
Until the end of the week, data on new home sales in April, the number of new building permits and private sector lending will be published. Any improvement in performance relative to March is able to support the AUD in favor of retracement and technical factors.
The AUD/USD pair has formed support at 0.6860/70 and has good chances to seize the moment and roll back a little higher. The immediate goal is 0.70 and the movement may develop to 0.7070/80 but the achievement of this level should be supported by new positive factors.
NZD/USD pair
The coming week will be devoted to issues of financial stability and budget prospects. Today, RBNZ will present a semi-annual report on financial stability. A little later, the business forecast from ANZ will be released. On Thursday, the Treasury report on the budget is scheduled, then on Friday, ANZ will provide new consumer confidence data. The RBNZ will provide private sector lending.
The decrease in the RBNZ on May 8 was a response to a slowdown in GDP growth and low inflation, which in the first quarter was only 1.5% y/y. It is still too early to expect a recovery in the consumer sector after the rate cut. Expectations from the Treasury report are rather negative since tax revenues are expected to decline.
Kiwi currently has no clear direction. The three-month decline period has been completed and the support level of 0.6427 was not reached. Its chance for corrective growth has increased. Kiwi will trade sideways and corrective growth may stop at 0.6575/80 zone while waiting for the Treasury report.
The material has been provided by InstaForex Company - www.instaforex.com