The passion around the trade deal between the United States and China does not subside, which gives rise to sharp movements in the foreign exchange market. Investors are beginning to worry since Friday, and consequently, the introduction of new tariffs on Chinese goods from the US is getting closer. Although Beijing is committed to continue its negotiations with Washington, the closest possible time frame for the escalation of the trade war between the two largest economies in the world means that Donald Trump is more serious now than ever before. If the tariffs are really introduced, then losses in the foreign exchange market cannot be avoided.
Many experts expected the US currency to weaken this year, pointing to a slowdown in economic growth in the US and an improved economic performance in other countries. However, this has not happened so far.
It should be acknowledged that, despite the Fed's confusion in the face of the changed economic realities, when low inflation seems to be the norm, and the Fed's old time-tested instrument does not work anymore, the greenback is holding up pretty well. The USD index is still trading above the important mark of 97. Thus, it is possible that with the slightest weakening of market factors that are now putting pressure on the US currency, a sharp recovery in the dollar may follow, which will be particularly pronounced in relation to high-yielding and risky assets.
"Over the past few months, the rally of risky assets has been stimulated by two factors: the refusal of the US Federal Reserve System to raise interest rates and the recovery of the Chinese economy. However, risky assets poured a tub of cold water to the bulls last week. Contrary to expectations, the head of the US Federal Reserve did not discuss the idea of lowering interest rates last Wednesday. At the same time, a number of economic data for China last April turned out to be worse than forecast estimates." Citigroup currency strategists stated.
According to them, there is a very tangible chance that the dollar will be able to get out of the range and begin to strengthen.
The USD/JPY pair is trading near local lows, since the risk aversion continues to support demand for the yen as a safe haven.
Meanwhile, according to experts of Danske Bank, developments for the yen could follow a "bearish" scenario in the near future, given the increased uncertainty regarding the conclusion of the trade deal between the United States and China.
Despite the threats of Donald Trump, on Tuesday, the Chinese Ministry of Commerce confirmed that Deputy Prime Minister Liu He would arrive in the US today for talks, which are supposed to take three days to complete with the formation of a draft agreement.
Market participants are now lost in speculation whether the tightening of Washington's position is to speed up the negotiation process, or the introduction of new tariffs will be a response to Beijing's unwillingness to comply with the agreements that have already been reached.
"We believe that ending the trade war is in the interests of both China and the United States. Although the negotiation process may be delayed, we expect that the transaction will be concluded in the second quarter. Such a development will be negative for the yen. An additional risk for the latter is the possibility that, by resolving trade disputes with the Middle Kingdom, the United States may make claims to Japan and start threatening to impose duties on Japanese goods, "said by the experts of Danske Bank.
They recommend considering the decline in the USD / JPY pair as a strategic buying opportunity.
As for the single European currency, it demonstrates remarkable resilience, even despite concerns about the negative impact of the escalation of the US-China trade war on the eurozone economy.
According to ING analysts, the worst for the euro is already left behind. They believe that there are a number of reasons for opening long positions on the EUR/USD pair:
1. The reduction of the gap in the growth of GDP in the eurozone and the United States. By 2020, a cyclical slowdown in the United States will lead to a decrease in GDP growth rates of up to 2.0% or less, while in the eurozone, they will remain at 1.1–1.5% over the next 6-8 quarters.
2. The change in the differential interest rates of the Fed and the ECB. So far, the situation is in favor of the dollar, but in the case of a slowdown in the US economy, it will begin to change, which will lead to a weakening of the positive cash flow for the greenback.
3. Dual US deficiency. As economic growth slows down in the United States, the combination of a negative trade deficit / current account deficit and a state budget deficit will begin to have a stronger effect on the US currency.
4. Favorable indicators of the balance of payments in the eurozone. The peak of migration of European investors to foreign markets in search of profitability has already passed, and the combination of current account balance and direct and portfolio investment has become more positive for the euro.
5. Undervaluation of the single European currency. According to ING calculations, the euro is undervalued by 19% based on purchasing power parity.
The bank expects the EUR / USD pair to reach 1.18 in the fourth quarter, and 1.25 in 2020.
On the evening, the pair AUD/USD jumped to the weekly highs, increasing in response to the decision of the RBA to maintain the status quo instead of a possible reduction in the interest rate. However, the "Aussie" quickly lost the points, and the AUD / USD pair, was unable to consolidate above the level of 0.7040, and then began to crawl to the downside.
"The decision of the Reserve Bank of Australia to leave the rate at 1.50% knocked out of the "saddle" short-term speculators who put on the weakening of the "Aussie", and provided an impetus for the upward correction. However, the central bank only delayed the inevitable, and the rate will still be lowered. Thus, the Australian currency can only hope for positive surprises from the situation on the raw materials market, including iron ore prices, optimistic notes in the statement on the RBA's monetary policy, which will be published on May 10, and progress in the US-China trade negotiations " WESTPAC analysts said.
"So far, none of this has been observed. Thus, we consider it interesting to open short positions in AUD / USD with a target at 0.6970." they added.
