The Art of (Trade) War


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The Art of (Trade) War

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By Michael O’Neill

The Art of War by Sun Tzu is a 1,500 plus-year-old military strategy manuscript written by a brilliant Chinese general and philosopher. Chinese politicians and military leaders have studied this work for generations. The Art of the Deal by Donald J Trump is a 30-year-old vanity project by a billionaire real-estate developer who is now the President of the United States.

President Trump railed at China throughout his election campaign and his presidency. He blames China for America’s loss of manufacturing jobs and points to America’s $317 billion trade deficit with China as proof. He promised to act and he did.

The US and China traded tariff salvos at 12:01 am EDT July 6. Thirteen hundred items representing $34 billion worth of goods were slated for 25% tariffs when they land in America. They include flat-screen televisions, clothes dryers, a slew of manufacturing parts, motors, hydraulics, et, farming equipment and even sewing machine needles.

China added duties on soybeans, corn wheat, rice, beef, pork, fish, and dairy products. Some analysts suggest that those tariffs are a direct shot to Trump’s middle-America support base.

In the next few days and months, China President Xi Jinping and US President Donald Trump will employ strategies from the Art of War and The Art of the Deal as the US/China Trade War of 2018 unfolds.

For the US, tariffs on $34 billion are just a start. On July 5, the President suggested that $500 billion worth of Chinese goods may be subject to additional taxes. That’s impressive, considering that the US only imported $478.8 billion from China in 2016, per the Office of the United States Trade Representative.

That takes care of Chapter 1; ‘Think Big” in Trump’s book.

President Xi Jinping reportedly told officials that the country must pick its battles. That is a page out of Sun Tzu’s manuscript. He wrote, “According as circumstances are favourable, one should modify one’s plans.”

In Chapter 2 of the Art of the Deal, President Trump wrote “the best thing you can do is deal from strength and leverage is the biggest strength you have. Leverage is something the other guy wants or has to have or best of all, can’t do without.” The US has leverage. Its trade deficit with China in 2016 was $347.0 billion.

China has leverage as well. They hold $1.18 trillion of US government debt. China could wreak havoc with America’s economy by selling large chunks of their holdings which would drive interest rates higher, potentially derailing the US economic engine. President Jinping will heed one of Sun Tzu’s five essentials for victory which is “He will win who knows when to fight and when not to fight.”

This trade war may not be a long, drawn-out affair. President Trump could lose a lot of clout in November if the mid-term elections shift the balance of power to Democrats. There are 34 out of 100 Senate seats up for grabs. The Democrats only need to add two seats to control the Senate but would need another 25 seats to control the House of Representatives. President Trump also needs to get re-elected in 2010.

President Xi Jinping doesn’t have such worries. He is not subject to any term limits, and many believe he is as powerful as Chairman Mao Zedong in his heyday.

China may have the most to lose. The US is the destination for 19% of its total exports while only 9.2% of American exports go to China. (source: OEC 2016 data) However, Mr Trump is waging trade war on many fronts including against Canada, Mexico, and the European Union and history proves that multi-front wars are doomed to failure.

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Source: Statista.com

Global equity markets reacted with a shrug. The impact of tit-for-tat tariffs have been discussed and disseminated for a couple of months, so no one was surprised when they came into effect. China’s Shanghai Shenzhen CSI 300 index rose 0.68%, but it is down 16.52%, year-to-date. It has also underperformed the S&P 500 by 17% since March, evidence that the market believes that in the short term, China is more vulnerable to a trade war than is the US. European bourses have recorded small gains, except the UK’s FTSE100. FX markets were nonplussed as well and opened in New York close to unchanged from Thursday’s close.

Republicans (GOP) should know that anti-trade policies are cancer to an economy. The GOP was responsible for a trade war that exacerbated the Great Depression. In 1930, Reed Smoot and Willis C Hawley, both Republicans, sponsored a protectionist trade act. The result was devastation. Some historians believe the Smoot-Hawley act was responsible for 33% of the 66% decline in global trade between 1929-1934, according to a Fraser Institute article in October 2016.

In 1906, George Santayana, a Spanish philosopher and author wrote “Those who cannot remember the past are condemned to repeat it.” President Trump is not a history-major.

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Dovish Draghi dines on haws-Weekly 15Jun18


ARTICLE / 59 minutes ago

Dovish Draghi dines on hawks

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

·

· ECB and FOMC combine to crush EURUSD

· BoE policy meeting headlines an otherwise dull week ahead

· USDCAD kicks off another leg higher

·

Now you see it. Now you don’t. Multiply by 13.38 billion. Photo: Shutterstock

By Michael O’Neill

Osteria Francescana is a Michelin 3 Star restaurant in Modena, Italy. A twelve-course tasting menu will cost you €270. Adding the wine pairing option is another €180. If you bring a date and pay for parking, you just made €1,000 disappear, or US $1,156.00. That is an impressive feat, but it pales in comparison to what European Central Bank President Mario Draghi accomplished on June 14.

He made US $13.38 billion disappear.

Most of the loss occurred in less time than it would have taken the Osteria Francescana diner to finished the third course.

The $13.38 billion number is reasonably accurate. The Bank for International Settlements Triennial Central Bank Survey in September 2016, estimated that the daily spot FX turnover in April 2016 was US $1.70 trillion or €1.49 trillion. EURUSD lost 0.0290 points from its post-ECB statement peak to the Asia trough. Simple multiplication gives the result.

Traders eagerly anticipated the June ECB policy meeting. They expected the governing council to announce an end date for the quantitative easing program. It is the first step toward policy normalisation. However, they but were cautious as they had been disappointed in the past.

EURUSD rallied 5.4% between January and April, 2018, before Draghi appeared to defer a QE statement until later in the year. They didn’t want to be fooled again.

They weren’t. The ECB said that net asset purchases would end by December 2018. EURUSD popped on the news.

Then “Dovish Draghi” struck. The policy statement also said:

“we decided to keep the key ECB interest rates unchanged, and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path.”

EURUSD collapsed. The move was exacerbated by Wednesday’s Federal Open Market Committee decision. The Fed raised interest rates by 0.25%, putting the Federal Funds target rate at 1.75%-to-2.00% and suggested that two more increases were likely in 2018. The hawkish tone to the Fed statement sharply contrasted with the ECB message and EURUSD paid the price.

The EURUSD technical are bearish while prices are below 1.1800, looking for a break of support at 1.1490 to extend losses to 1.1364. (61.8% Fibonacci retracement level of the April 2017- February 2018 range)

Chart: EURUSD daily with Fibonacci retracement levels

Source: Saxo Bank

The FOMC statement (and broad US dollar strength) wreaked havoc on the Canadian dollar, which was already suffering from the risk of a trade war with the US.

The Bank of Canada deferred a rate increase in March because of “growing uncertainty from trade policy developments.” That uncertainty faded in April and May after US and Canadian officials expressed optimism for a renegotiated North American Free Trade Agreement. The May 30 BoC policy statement was considered hawkish with many analysts pencilling in a rate hike in July. Those forecasts came under duress after the G-7 war of words between Prime Minister Trudeau and President Trump. Trade woes got worse on June 14. Italy announced that it would not ratify the European Union’s free trade agreement with Canada. USDCAD rallied supported by widening Canada/US interest rate differentials

USDCAD has climbed from 1.2526 to 1.3152 since April 16. The uptrend is intact while prices are above 1.2920 with the break above the 2018 peak of 1.3125 targeting gains to 1.3200 and then 1.3375.

The silver lining in the cloud is that depressed level of the currency gives the BoC plenty of room to raise interest rates.

Chart: USDCAD daily

Source: Saxo Bank

The week ahead

Major Events: Thursday: Bank of England policy meeting. There is plenty of room for GBPUSD volatility. UK data has been mixed, diminishing the risk of a rate hike. However, a hawkish statement would underpin sterling.

Thursday: Swiss National Bank policy meeting

ECB Forum on Central Banking June 18-20: there will be no shortage of top Central Bankers providing insight including ECB President Draghi, and Fed Chair Jerome Powell

Major Data: Friday Eurozone “flash” PMI. They should have limited impact due to their proximity to June 14, ECB meeting.

Canada: Friday CPI and retail sales: Better than expected data will help set the table for a July rate hike.

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Canada G-7 – more of a fight club than a forum-8Jun18


Canada G-7 – more of a fight club than a forum

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

·

· US dollar grinds higher ahead of major event risk

· G-7 meeting may be more acrimonious than genteel

· Weak Canadian employment data underpins USDCAD

·

Big grins at the summit in Taromina, Italy, last year. Who’s laughing now?

Photo: Wikimedia Commons

By Michael O’Neill

The Canada G-7 meeting in Charlevoix, Quebec is beginning somewhat acrimoniously. It will not be a forum where leaders of the industrialised nations can meet in a relaxing atmosphere to discuss issues affecting the international community. Instead, it is shaping up to be a politician’s version of the UFC.

Prime Minister Justin Trudeau is the host. He is proud of the themes and leader’s programme for this meeting. They are: a) Investing in growth for everyone. b) Advancing gender equality and women’s empowerment. c) building a more peaceful and secure world. c) Preparing for jobs of the future. d) Working together on climate change, oceans, and clean energy.

The leader’s agenda has a glaring omission. There isn’t a time-slot scheduled for free trade and tariff discussions. That may change. The evidence is this tweet sent on Thursday morning: “Isn’t it Ironic? Getting ready to go to the G-7 in Canada to fight for our country on Trade (we have the worst trade deals ever made), then off to Singapore to meet with North Korea and the Nuclear Problem…But back home we still have the 13 Angry Democrats pushing the Witch Hunt!”

Prime Minister Trudeau and French President Emmanuel Macron used a photo op on Thursday to send a warning to President Trump. They said they would warn the President that his tariffs will “backfire and harm America’s workforce.”

The thin-skinned President was not likely to take kindly to criticism from a couple of youngsters 25-30 years his junior. He didn’t. Within hours of the statement, he tweeted his reply: “Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers. The EU trade surplus with the U.S. is $151 Billion, and Canada keeps our farmers and others out. Look forward to seeing them tomorrow.” A few hours later he took another shot at Justin Trudeau. “Prime Minister Trudeau is being so indignant, bringing up the relationship that the U.S. and Canada had over the many years and all sorts of other things…but he doesn’t bring up the fact that they charge us up to 300% on dairy — hurting our Farmers, killing our Agriculture!”

Late last week, Trump floated the idea (again) of having bilateral discussions with Mexico and Canada. On June 5, National Economic Council director Larry Kudlow said that Trump’s preference is to negotiate separately.

The Washington Post reported that President Trump wanted to skip the meeting altogether. He has since confirmed his attendance. However, he must have read the Leaders Programme for Saturday, June 9, because he is bailing, early.

The faces have been slapped; the gloves are off. In G-7 Fight Club, the only rules are Trump’s rules.

Loonie’s feathers get plucked

It should have been a good week for the Canadian dollar. It wasn’t. On May 30, the Bank of Canada issued a hawkish statement, hinting at a July rate increase and leaving the door open for more. However, the positive Canadian dollar sentiment didn’t survive the month end, and trade jitters have been the catalyst. That’s when the US slapped tariffs on Canadian steel and aluminium imports, even though the Nafta renegotiations are still ongoing. Fears about the demise of Nafta and concern about a hawkish conclusion to the June 13 Federal Open Market Committee meeting are underpinning USDCAD.

The Canadian labour report didn’t do the Canadian dollar any favours either. The weaker-than-expected data raises questions about governor Poloz’s optimistic economic outlook while increasing the currency’s downside risk to adverse trade news.

USDCAD is in an uptrend from February while prices are above 1.2750 with a break above resistance in the 1.3165-1.3225 area opening the door to further gains to 1.3500

Chart USDCAD daily with long term support and resistance levels noted.

Source: Saxo Bank

The week ahead:

Major Events

Tuesday: North Korea/US meeting in Singapore.

Wednesday: FOMC meeting and press conference: Market expects 25 bp rate hike. The Committee may give a “hawkish” tweak to the statement.

Thursday: European Central Bank policy meeting: Markets expecting news of an end-date for QE, as hinted at by ECB chief economist Peter Praet.

Friday: Bank of Japan policy meeting

Major Data

Tuesday: UK employment report. Unemployment rate is expected to be unchanged at 4.2%

US May CPI: forecast 0.2%, unchanged from April.

Wednesday: UK CPI, PPI and Retail Sales. CPI is expected to rise 2.6%, y/y vs April 2.4%, y/y increase.

Thursday: Australia employment is expected to add 18,2000 jobs with a drop in the unemployment rate to 5.5% from 5.6%.

Friday: EU harmonised CPI. YoY rate expected to rise to 1.9% from 1.2% Also, US industrial production and capacity utilisation data.

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For whom the tariffs bell tolls Loonieviews weekly 1Jun18


For whom the tariffs bell tolls

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

· US nonfarm payrolls surprises to the upside

· Italy forms a government giving risk aversion a reprieve

· President Trump tweeting down the tariff trail

By Michael O’Neill

The 1940 Ernest Hemingway book titled, “For Whom the Bell Tolls” is a Pulitzer Prize-winning (then losing) classic about the brutality of the Spanish Civil War. If President Trump were to rewrite this classic novel, the title would change to “For Whom the Tariffs Toll.” It would not be a classic. and wouldn’t win any prizes.

On May 31, Trump announced that he was implementing tariffs on steel and aluminium imports from Canada, Mexico, and the European Union, citing national security. National Security? Who should be afraid of whom? The length of the international boundary line of the US/Canada border, excluding Alaska is 3,987 miles (6,416.5 km), which Canada may find difficult to defend.

The Canadian military consists of 88,000 personnel, 415 aircraft including 120 vintage fighters, 50-year-old helicopters and 80 tanks. The Navy boasts 63 vessels which include 4 used submarines, bought in 1998, from Great Britain.

Mexico has 383,575 military personnel, no fighter planes, no tanks and a Navy with mostly patrol craft. The European Union doesn’t have any military. (Of course the individual countries making up the bloc, do.)

On the other hand, the USA has 2,083,000 military personnel, 13,362 military aircraft including 5,765 fighter planes and attack helicopters. They also have 5,884 tanks and 415 naval vessels including 20 aircraft carriers.

President Trump is right about a threat to national security, but it is Canada and Mexico who are threatened.

The implementation of the steel and aluminium tariffs may merely be an aggressive negotiating tactic by the Americans. They do not go into effect until July 1, which leaves 30 days for back-pedalling. Toronto’s Global News reported Prime Minister Trudeau had planned to fly to Washington earlier in the week, to sign a new Nafta deal. When Vice President Pence said the new agreement had to include a “sunset” clause, Trudeau baulked. The prime minister believes that a complicated tri-lateral trade deal would be worthless if it just lasted five years.

If the tariffs are grandstanding and a Nafta deal was close, it is conceivable that they will be reversed in short order, at least as far as Mexico and Canada are concerned. The EU is a different kettle of fish, but they are far better equipped to deal with a trade war. Europe prospered for thousands of years before they even heard of America.

Americans may be hearing tariff bells tolling, but the world is watching the “Gong Show” and waiting for Trump to get “gonged.”

Canada GDP and BoC at odds

On May 30, the Bank of Canada released a mildly hawkish policy statement after leaving interest rates at 1.25%. The BoC has thrown "caution” to the wind, literally. The April 18 and March 7 statements closed with this phrase: “Governing Council will remain cautious in considering future policy adjustments.” The May 30 statement replaced “cautious” with “gradual.”

USDCAD plunged when the deleted word was noticed, falling from 1.3018 to 1.2838. Strategists had visions of 1.2500 dancing in their heads, and all they needed was for the May 31 Q1 GDP data to confirm the economic outlook seen by policymakers at the BoC. It didn’t happen. On May 31, Canada’s Q1 GDP disappointed markets. It only rose 1.3%, missing the forecast of 1.7% and was the third quarter of sub 2.0% growth.

USDCAD soared, but the rally stalled just below 1.3000. The domestic data cupboard is bare until the middle of next week leaving USDCAD with a bullish bias and tracking broad US dollar moves.

Chart: GDP and final domestic demand

Source: Saxo Bank

Highlights: The week ahead

Major Events:

Monday: Traders will likely ignore the G7 Finance Minister meeting communique from the weekend gab-fest.

Tuesday: Reserve Bank of Australia policy meeting and statement.

Major Data:

Monday: Australia Retail Sales, UK May Construction PMI

Tuesday: Eurozone and UK PMI data

Wednesday: Australia GDP, US Trade, Canada Trade

Thursday: Australia Trade, Eurozone GDP

Friday: China Trade, Canada Employment Report

Highlights- the week that was

Major Events:

FX markets were moribund on Monday because of UK and US holidays.

Italian politics dominated trading all week. President Sergio Mattarella’s rejected the pending new coalition government’s choice for economics minister. The pasta hit the fan. EURUSD plunged to 1.1511 from 1.1638. Reuters said that short-term Italian bonds had their worst day since 1992. US 10-year Treasury yields lost 5.31% at one point on Tuesday. By the end of the week, the two leading Italian parties were still working to form a coalition government.

President Trump levied tariffs on steel and aluminium imports from Canada, Mexico, and the European Union. USDCAD and USDMXN soared.

Thursday was month end. Reports of massive EURUSD buying for portfolio rebalancing purposes proved correct, but the bulk of the move occurred on Wednesday.

Major Data

Wednesday: A slew of US economic reports including Q1 GDP were weaker than expected undermining the US dollar.

Thursday: Eurozone May CPI rose 1.9%, well above the 1.6% forecast giving EURUSD a lift. Weaker than expected Canada Q1 GDP lifted USDCAD. US economic reports were robust, led by a surge in Chicago PMI to 62.7 from 57.6 in April. Oil prices got a boost after EIA reported a 3.6 m/b decline in weekly crude inventories.

Friday: Japan Nikkei Manufacturing PMI at 52.8 (forecast 52.5) underpinned USDJPY. Eurozone Markit PMI a non-factor. UK Manufacturing PMI beat expectations and GBPUSD rallied.

US Nonfarm payrolls surpassed the 188,000 forecast and gained 223,000 new jobs. The unemployment rate of 3.8%, was the lowest in 18 years.

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Loonieviews weekly 20Apr18


ARTICLE / 4 hours ago

FX traders blindsided by bankers waxing dovish

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

· Canada inflation miss knocks loonie for a loop

· ECB and BoJ meetings are the key focus next week

· Oil prices soar on talk of production cut extension

BoE governor Mark Carney downplayed a May hike and sterling slumped. Images: Shutterstock

By Michael O’Neill

Canadian music legend Gordon Lightfoot sang “

in 1998. FX traders were singing a similar tune this week, although their lyrics may have contained expletives.

Bank of Canada Governor Stephen Poloz got the ball rolling on Wednesday. Many FX traders believed the tone to the BoC statement and press conference leaned toward dovish because of concerns that “export growth and investment were held back by competitiveness challenges and trade uncertainty". USDCAD, which had probed support at 1.2550, roared higher and touched 1.2682 on Friday morning in Europe.

Former BoC governor and current Bank of England Governor Mark Carney may have read the text of the BoC policy statement and Monetary Policy Report. On Thursday, April 19, he blindsided sterling traders when he appeared to downplay the chances for a rate increase in May. GBPUSD collapsed from 1.4248 to 1.4038 on the news.

Arguably, the USDCAD rally and the GBPUSD plunge were more a factor of positioning, rather than a wholesale shift in medium-term sentiment. Both central bankers merely stated the obvious; that ongoing trade issues have played a role in lower investments. Central bankers are paid to see the cloud while others focus on the silver lining.

Poloz and Carney reiterated that interest rates were going higher, suggesting that both currency moves may be buying opportunities.

USDCAD reversed early morning gains on Friday and climbed to 1.2717 from 1.2625 after Canadian monthly inflation data was a tick lower than forecast. The year over year data was 2.3% in March following a 2.2%, y/y increase in February. Stats Canada says “This was the largest year-over-year increase since October 2014.”

Chart: change in Canada CPI

Source: StatisticsCanada

The USDCAD downtrend is intact while prices are below the 1.2720-30 area. A move below intraday support at 1.2660 would suggest a period of 1.2530-1.2730 consolidation.

Chart: USDCAD daily

Source: Saxo Bank

The week ahead

It is a short week for Australians and New Zealander s who have Wednesday, April 25, off for ANZAC Day.

Major Events:

European Central Bank meeting Thursday, April 26. FX traders will be looking for guidance on the end of QE.

Bank of Japan Policy meeting Friday, April 27

Major Data:

Monday is purchasing managers index day with reports from Japan, Germany, the Eurozone, and the US. Eurozone data may continue the recent trend of soft economic reports.

Tuesday: Australia Q1 CPI. The Reserve Bank of Australia is on hold for the foreseeable future, suggesting the impact from this data, if any, will be fleeting.

Thursday: US March durable goods orders (forecast 1.0% vs February 3.1%)

Friday. It may be a busy Asia session with New Zealand Ttade data, Australia PPI and Japan CPI, employment report, large retailers sales and industrial production data ahead of the Bank of Japan meeting.

UK Q1 GDP (forecast 0.4%) may be affected by the weather. A weaker than expected report would support Mark Carney’s comments suggesting a May rate increase is far from a “done deal.”

US Q1 GDP (Forecast 2.3% vs previous 2.9%) is thought to be affected by poor weather and late tax refunds.

The week that was:

The US, France, and the UK fired missiles at three Syrian targets on the weekend which could have led to a nasty start to trading. It didn’t happen.

Monday: Asia FX markets were relatively quiet and rangebound. The underwhelming response by Russia to the Syria attack (they called an emergency NATO Security Council meeting) sparked a whiff of positive market sentiment. However, a lack economic news in Europe and Asia limited currency moves. The US data, including retail sales, was mildly disappointing and combined with a more upbeat tone to global trade, led to broad but limited US dollar selling. The greenback finished the session with losses across the board compared to Friday’s closing levels.

Tuesday: FX markets were choppy but rangebound in Asia. Things changed in Europe after a couple of weak economic reports. Sterling got spanked after the UK employment report was not as robust as expected. GBPUSD dropped from 1.4374 to 1.4307 on the news. EURUSD fell to 1.2365 from 1.2411 when German and Eurozone ZEW sentiment surveys were below forecasts. USDCHF rallied following weekend comments by the Swiss National Bank Chair Jordan. Better-than-expected, but second-tier USD data added to US dollar demand but briefly. The greenback finished the day on a mixed note. Wall Street rallied and closed with gains.

Wednesday: The antipodean currencies traded sideways in Asia while USDJPY had a bit of a pop to it rising from 107.00-107.40. The range gradually narrowed until the New York close. Japanese Trade data didn’t have any impact. Sterling got clobbered in Europe after a series of weak UK economic reports including weaker than expected inflation data. GBPUSD dropped from 1.4313 to 1.4174. EURUSD dropped, but not as dramatically, after soft German and Eurozone ZEW reports. Both currency pairs rebounded in New York, but the rally was shallow. The Bank of Canada left rates unchanged and issued what some believe was a dovish statement. USDCAD soared from 1.2550 to 1.2557. Oil prices climbed from the Asia low of $66.58 to $68.88. A decline in US crude inventories and a report that Saudi Arabia wanted to see oil at $100/barrel powered the move.

Thursday. FX markets in Asia and Europe were sleepy, although New Zealand inflation data and the Australian employment data caused a brief stir. USDJPY continued to look for direction while drifting in a 107.00-50 range. There wasn’t any top-tier Eurozone data, which left EURUSD rangebound. A disappointing UK retail sales report led to a short-lived bout of GBPUSD weakness, as poor weather may have hurt the results. The US dollar roared to life in New York. Falling commodity prices and the outlook for higher US rates drove commodity prices lower. Sterling crashed when Bank of England Governor Mark Carney appeared to dismiss the prospect of a May rate hike. Oil prices gave back earlier gains, and Wall Street closed with small losses.

Friday: USDJPY finally cracked above resistance at 107.50 helped by firm Treasury yields and broad US dollar strength. The US dollar closed the week with strong gains as traders turn their focus to the US economic growth and higher interest rate outlook.

– Edited by Clare MacCarthy

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Loonieviews weekly 13Apr18


Trade war fog lifts and commodity currencies rise

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

·

· USDCAD downside has further to go

· Headlines and Twitter drove FX direction last week

· President Trump flip-flopping on trade

For the loonie, the direction seems higher. Pic: Shutterstock

By Michael O’Neill

The Bank of Canada is in the spotlight on Wednesday. The quarterly Monetary Policy Review, monetary policy statement and the governor’s press conference are due, and this time, they won’t be constrained by trade worries.

The BoC last raised interest rates in January, a hawkish move, and in the accompanying policy statement they justified the move because of strong data, rising inflation and said the economy was operating roughly at capacity. However, they complained that uncertainty around the North America Free Trade Agreement (Nafta) clouded their outlook. The rate hike was considered dovish, and the Canadian dollar was sold.

The March policy meeting reiterated Nafta concerns but included uncertainty about global trade as well. That statement was deemed dovish, and the Canadian dollar was sold.

Just as winter has changed into spring, Nafta and global trade concerns have changed from fear to hope. President Trump, the architect of most of the trade uncertainty, has flip-flopped. One week he is levying tariffs on steel, aluminium and $100 billion worth of Chinese imports and the next, he is issuing exemptions and delays. On Thursday, April 12, the president told Republicans that the US and China were negotiating and may be able to avoid a trade war.

Last week, there were many reports Trump was demanding an “outline to a Nafta agreement” be ready to sign at this week’s Summit of the Americas in Peru. That didn’t happen, but on April 12, Trump told Republican representatives that “We’re getting close on Nafta”. It could be two weeks; it could be three months, it could be five months, I don’t care. I have no timeline.” CBC news reports that the American’s have reduced their auto parts demand to 75% North American content, down from 85%

The improved outlook for Nafta and global trade reduces uncertainties for the Bank of Canada, suggesting monetary policy doesn’t need to be restrained. April 18 may be too soon to raise interest rates, but not too soon for a hawkish policy statement. If so, USDCAD support at 1.2450 is a likely target.

Chart: USDCAD 4-hour

Source: Saxo Bank

The week ahead:

Monday: US March Retail Sales (forecast 0.3%, ex-autos forecast 0.3%, m/m) are expected to beat the February numbers and underpin the dollar.

Tuesday: The Reserve Bank of Australia policy meeting minutes from the April 3 meeting should be a non-event as Australian interest rates aren’t going anywhere for a long while.

China Q1 GDP is forecast to rise 6.8% which should support the antipodean currencies.

UK unemployment rate is forecast to dip to 4.1% from 4.3% with average earnings excluding bonus (3 months, y/y) rising to 2.9% from 2.6%.

Wednesday: UK Retail Price Index, DCLG Home Price Index, PPI and CPI will ensure a lively day for GBPUSD traders. Eurozone inflation for March (Forecast 1.4%, y/y, Core O.9%)

The Bank of Canada Policy meeting, Monetary Policy Report and Press Conference will be key for USDDCAD. The improved tone to the Nafta talks suggests a hawkish policy statement, although rates will be left unchanged.

Thursday: New Zealand CPI (forecast 0.5% q/q vs previous 0.1%). Westpac economists suggest the recent inflation dip is due to technical issues. Australia March employment gains are expected to rise by 31,500 (February Actual 17,500) and the unemployment rate to drop to 5.4% from February’s 5.6% level. UK Retail Sales (forecast 1.1%, vs February 1.5%, y/y)

Friday: Canada February Retail Sales (0.1% vs January 0.3%, m/m) as the data is stale and too close to BoC statement. Core CPI is expected to be unchanged at 1.5%.

The week that was:

Monday: The US dollar posted small gains in Asia and Europe in an uneventful session. Trades war fears abated after President Trump tweeted about his friendship with President Xi Jinping and National Economic Advisor Kudrow telling Fox News “I don’t think there is any trade war in sight.” North Korea got into the act when they reportedly said they were open to talks about nukes. The US dollar lost ground throughout the New York session. Sterling held on to gains from upbeat housing data and expectations for higher UK rates. USDCAD dropped after an upbeat Bank of Canada Quarterly Business Outlook Survey. Wall Street erased nearly all of the day’s gains in the last hour of trading after news that the FBI raided the offices of Trump’s lawyer. Oil prices climbed on fears that rising Middle East tension would impact supply.

Tuesday: Chinese President Jinping, remarking about the trade dispute with the US, said dialogue was the best way to resolve disputes. His decision not to escalate trade frictions improved risk sentiment. The US dollar opened in New York with small losses except against the Japanese yen. The trend continued until the end of the day with only the Japanese yen finishing on a down note. Oil prices rallied supported by continued Middle East tensions and hopes of increased demand. Wall Street rallied due to the downgraded trade risks.

Wednesday: The brakes were applied to the dollar’s slide in Asia and Europe. Traders were content to await the release of the US inflation report and FOMC minutes. March CPI was lower than expected which caused a brief and limited US dollar sell-off. Then President Trump hit send on his Twitter account. He railed at Russia for threatening to shoot down US missiles with a missile threat of his own. He tweeted again and blamed Democrats for his Russia issues. The FOMC minutes gave the greenback a bit of a bid as they were determined to be “hawkish.” Oil prices continued to rise touching $66.78/barrel after Yemeni rebels launched missiles at Riyadh and Saudi oil storage facilities. None landed. Wall Street finished almost flat for the day.

Thursday: The Asia and European sessions were low-key. Australia data wasn’t strong enough for AUDUSD to break resistance in the 0.7780-00 zone. NZDUSD was underpinned by comments from RBNZ Deputy Governor McDermott but stayed in a tight range. USDJPY was supported by BoJ Governor Kuroda promising to maintain stimulus. New York opened with a tweet from Trump downplaying the risk of a retaliatory strike on Syria. The New York FX session was noisy, but when the day ended, prices were little changed from the open. The outlook for global trade took a turn for the better after Trump said that negotiations with China were going well. He also said he would revisit the TransPacific Partnership and that the Nafta negotiations were going well.

Friday: USDJPY, AUDUSD and GBPUSD extended overnight gains in early New York trading. The rest of the G10 majors are close to flat in an uneventful Friday session.

– Edited by Clare MacCarthy

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6Apr18 Loonieviews Weekly


Next on the agenda? Making Nafta great again

Michael O’Neill

FX Trade Strategist / http://www.Loonieviews.net

Canada

·

· Weak US jobs data may be weather-related

· Loonie rallies on Nafta optimism and a strong employment report

· Upcoming ECB meeting may underpin EURUSD

In Trump’s optic, making America great again involves squashing free trade.

Pic: Brian Kenney / Shutterstock.com

By Michael O’Neill

The “worst deal ever” is not quite “beautiful, great, incredible, huge" or any other of President Trump ’s favourite superlatives, but Nafta is fast becoming a priority.

On April 2, media reports quoting “sources with knowledge” said the president was pushing to have an “outline” of a Nafta agreement signed any ready to be announced at the summit of the America’s in Peru on April 13 and 14. Those reports received extra credence on April 5 after news that the eighth round of formal Nafta talks was delayed because of a series of high-level meetings in Washington.

That news and Friday’s US and Canadian employment reports bode well for USDCAD bears. Nonfarm payrolls (NFP) did not live up to expectations, and the Canadian report exceeded them. The weaker than expected NFP (Actual 103,000 vs forecast 190,000) undermined the US dollar, but the impact was marginal. Poor weather at the beginning of March, may have skewed the data.

Canada added 32,300 new jobs, all of them full-time. It may even kick-start a new dialogue about the timing of the next Bank of Canada rate increase. The increased odds for a successful trade deal renegotiation will remove the cloud of uncertainty from the Bank of Canada’s outlook. The employment data shows the Canadian economy is humming along, nicely. It may be too soon for a rate hike at the April 18, meeting, but the May 30th meeting should be wide open.

All of the above and bearish short-term USDCAD technicals target further losses towards 1.2500 in the coming days. USDCAD broke below 1.2793 (38.2% Fibonacci retracement of February-March range) which has put a target on the 61.8% retracement level of 1.2589.

Chart: USDCAD daily with Fibonacci retracement levels.

Source: Saxo Bank

The week ahead

Mario Draghi and the European Central Bank (ECB)headline a relatively benign week, data-wise. Trade talks and presidential tweets are the wild cards.

Monday: The Bank of Canada Business Outlook Survey does not usually attract a lot of attention from FX traders. This one could be different considering the recent shift in tone to Nafta talks.

Tuesday: New Zealand Business Confidence data could lift NZDUSD. Economist expect a positive jump from the previous report due to improved data

Wednesday: Westpac Consumer Confidence may underwhelm due to recent trade war jitters. There is a lot of second and third tier UK data which will entertain GBPUSD traders. The US inflation report is the main attraction with energy prices having a negative impact. Nevertheless, calculation methodology may lead to a rise in the Core data.

Thursday: Australia February Home Loans data is expected to show a small improvement. (Forecast -0.6 vs January -1.1%) The ECB policy meeting and press conference will underpin EURUSD on the days leading up to it. Traders will be looking for more clues as to the timing of policy normalization.

Friday: China trade data will get extra scrutiny thanks to the ongoing trade spat. Eurozone data will have minimal impact as it follows the ECB meeting.

The week that was:

It may have been a short week in many markets, but there was no shortage of volatility and drama, especially on Wall Street.

Monday: Australia and New Zealand markets were closed for Easter Monday, but AUDUSD managed to trade lower after weaker than expected Caixin China Manufacturing Index dipped to 51.0 from 51.6, previously. The European and UK sessions were deathly dull due to Easter Holidays. Canada was partially closed. Wall Street tanked. A series of Trump tweets about Amazon and China’s announcement of tariffs on $3 billion worth of US food imports, spooked traders. WTI oil prices finished 3.0% lower. Only the Japanese yen finished the day with a gain.

Tuesday: The day started wobbly. Asia equity markets followed US markets lower, but the move didn’t last. The Reserve Bank of Australia didn’t do anything to disturb the market. USDJPY bottomed early and climbed steadily into the New York open. Sterling inched higher supported by a forecast-beating Manufacturing PMI report. New York FX trading was subdued. However, USDCAD plunged on news that President Trump was pushing for an “outline” of a Nafta agreement the following week, to be announced in Peru. Wall Street recouped most of Monday’s losses, helped by a report that the Trump administration didn’t have plans to go after Amazon.

Wednesday: Risk aversion was the “soup du jour.” China launched new tariffs on about $50 billion of US imports and markets feared a trade war had just begun. The Japanese yen and Swiss franc were in demand although the FX moves were understated. Gold rallied from $1,332.95 to $1,348.24 by breakfast time in New York. Wall Street sank but then reversed course after National Economic Council Director Larry Kudrow suggested the tit-for-tat tariff exchange was just negotiating tactics. Oil traders liked the news and WTI rose 1.9%. Both the Swiss franc and yen finished down on the day.

Thursday: Trade war nerves were soothed, and traders shifted their focus to Friday’s US employment report. USDJPY climbed steadily supported by higher Treasury yields. AUDUSD enjoyed a short-lived rally to 0.7725 after posting a larger than forecast trade surplus, but pre-payrolls positioning drove prices down to 0.7680 by the New York close. Soft UK services PMI put GBPUSD under pressure until the New York afternoon, when it clawed back some of the losses. Less-than impressive Eurozone data and the outlook for a robust NFP number drove EURUSD down. Wall Street gained in a somewhat reluctant manner after a weak start to the day. The US dollar closed in New York with gains all around, except against the Canadian dollar.

Friday, Asia markets were roiled at the start following a Trump threat to levy tariffs on another $100 billion worth of China imports. The quickly calmed down and look ahead to the US employment data. NFP disappointed but the miss may have been weather-related.

– Edited by Clare MacCarthy

Michael O’Neillis an FX consultant at IFXA Ltd

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