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China Strikes Back, FX & Equities Crash

  • Kathy Lien
  • 14 May 2019

Daily FX Market Roundup May 13, 2019

This morning, China announced new retaliatory tariffs on $60B worth of US goods, sending equities and currencies sharply lower. The Dow Jones Industrial Average fell more than 600 points as the NASDAQ and S&P 500 dropped to their lowest levels in 6 weeks. China has been slow with their response and at $60B, their tariffs are a fraction of the $200B in Chinese goods subjected to higher duties. However China can no longer match the US dollar for dollar but the tariff rates will increase by roughly the same amount from 10% to 20-25%. With a June 1st start date, China is still hoping to reach an agreement but President Trump is under far less pressure to deal than President Xi and the tone of his tweets along with the threats of further tariffs is not encouraging.

What's interesting about today's moves is that while the steep decline in stocks, drop in global bond yields and slide in oil prices are consistent with risk aversion, outside of the initial drop in USD/JPY down to 109, the reaction in the currency market has been relatively tepid. US-Chinese trade tensions are boiling over and yet USD/JPY, AUD/USD and NZD/USD have fallen less than 1%. While it can be argued that the sell-off in all 3 pairs began last month, between the US' decision to impose tariffs last week to today, we've seen only about a 100 pip move. This tells us that these currencies are either deeply oversold, investors are skeptical of the US economy's ability to withstand slower growth and higher prices from China or they are waiting to sell at higher levels. Regardless, unless trade relations suddenly improve, the risk is to the downside for currencies and equities. If the Dow breaks 25,300, the next stop could be 24,000 and in that scenario, USD/JPY will be trading well below 109 with further losses in AUD and NZD.

The latest housing market numbers from Australia were also disappointing. Home loans fell -2.8%, against a forecast of -0.5% while investment lending dropped -2.7%. This week's business and consumer confidence reports are likely to be softer but if job growth slows on top of it all, an interest rate cut from the Reserve Bank in June or July at the latest is assured. AUD has fallen harder than NZD because Australia is more sensitive to slower Chinese growth but risk aversion will affect both currencies. Despite last week's exceptionally strong employment numbers, USD/CAD resumed its rise as oil prices fell.

The most resilient currency is the euro because green shoots are appearing in Germany and investors hope that the improvements will be reinforced by this week's economic reports. Eurozone industrial production and the German ZEW survey are scheduled for release on Tuesday. Both numbers should be firmer as they were taken before the meltdown in stocks and deterioration in US-Chinese trade relations. Sterling will also be in focus tomorrow with labor market numbers scheduled for release. Unlike Eurozone data, the risk is to the downside. Manufacturing, service and construction sectors all reported weaker job growth and if weekly average earnings growth slows as well, GBP/USD could drop below 1.29.

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.