The focus of traders' attention is still the tension in the US-China relationship. Any threats from Donald Trump against Beijing have a strong influence on the market. China is ready to use rare earth elements as weapons in the trade war with America. Metals are used in many industries, including the production of high-tech consumer electronics and military equipment.
A week earlier, market participants took Xi Jinping's visit to the JL MAG Rare-Earth Company plant as a hint at how Beijing's response to Washington's new duties could be. The aggravation of rhetoric is a kind of reaction to the harsh statements of Donald Trump, who during his visit to Tokyo made it clear that the Chinese had to grasp the proposed deal with their hands and feet. It's too late now because the US has changed its mind.
The long-running trade conflict, whose degree is constantly increasing, aggravates not only the position of the euro but also the Australian dollar.
Due to the tight trade relations with China, the "Australian" risks to be one of the main currency assets – the beneficiaries of the economic difficulties of China. As you know, the Chinese financial system is bursting at the seams. The chain of corporate defaults, which hit the Chinese market in January-April, reached the banking sector. A bank collapsed in the country, and it happened for the first time in two decades. Recently, the Central Bank of China announced the beginning of the rehabilitation of Baoshang Bank, whose total assets amount to $83 billion.
The Reserve Bank of Australia has taken a policy of easing monetary policy, as it foresees a significant slowdown in the Chinese economy. JP Morgan expects the Central Bank to reduce the rate by 100 basis points by the middle of next year, to 0.50% from the current level of 1.50% by the middle of next year. It should be noted that the first decline will occur at the meeting of the regulator next Tuesday, June 4.
According to the markets, only soft monetary policy can be an assistant to the RBA in achieving macroeconomic goals. Otherwise, inflation and GDP growth rates will continue to lag behind the targets.
Thus, a promising idea for the next two weeks may well be the sale of the AUD/USD pair. On Wednesday, "Aussie" in conjunction with the US competitor is trading just above the mark of 0.69.
As for the euro, it remains under pressure and continues the negative movement taken at the beginning of the week. In addition to concerns about the escalation of the conflict, the situation of the euro is aggravated by Italian problems with public debt. At the end of the year, the indicator may reach 3.4%, while the ceiling for all regions is set at 3% of GDP. Members of the EC consider the issue of penalties. Rome has already been warned, but political leaders seem to want to run into a conflict with Brussels. The yield spread of 10-year state bonds of Germany and Italy reached its highest level in 3 months, which is a negative factor for the euro.
