US China Trade War

Trade war effects will only take shape in August

5 Jul 2018 01:25 PM

By Gaurav Kashyap

Forex and commodity markets have held true to the ranges they established in June. The S&P 500 remains firmly entrenched between 2675 and 2800 while the yield on the 10-year US Treasury bond remains pegged below 3 per cent.

Despite closing one trading session above the magical 95 handle, the Dollar Index lacked further upward movement and stabilised in the 94 range, while my 93.60 support level held through the end of June. While the markets may have maintained sideways movement - the developing US trade wars theme has captured markets’ imagination.

While the earlier steel tariffs have been well chronicled, the latest round of action has seen Donald Trump slap more than $30 billion in tariffs on Chinese goods, effective from this Friday. China has been quick to retaliate. History has proven that no one wins in such scenarios and the impact on the US economy will no doubt be felt.

There has been traction in the US jobs market and while consumer spending may have secured a short-term boost from the recent Trump tax cuts, these gains will slowly be wiped away. While the height of these trade wars is yet to be seen, their effects will only start to be felt as early as August - an issue the Fed will no doubt take note of in their upcoming policy meetings. As a result, expect the US data docket to spring no major surprises in July.

US Nonfarm payrolls - due on Friday - are expected to come in at 200,000 while the unemployment rate is expected to remain unchanged at 3.8 per cent. The other key piece of data which should see movement coming into US dollar crosses is US inflation data due out on July 12. Year-on-year inflation is expected to grow to 2.9 per cent from 2.8 per cent, while the figure without food and energy included is expected to come in at 2.3 per cent. Any gain in excess of these levels will see immediate buying support coming into the greenback. Over the course of the month, the dollar should remain in the current range, as markets await further developments from the aforementioned developing trade war theme.

As a result of this sideways movement in the US dollar, I expect to see the Dubai Gold & Commodities Exchange EUR/USD contract to find strong support at 1.15 levels, with upsides capped at 1.1720 levels through July. Barring some inflation figures - due out on July 18 - which will remain unchanged, there is nothing of note on the EU economic calendar which would cause a breach of such levels. We will be keeping an eye out for how the political situation in Germany unfolds. The fragility of Chancellor Angela Merkel’s coalition could see a strong move towards those 1.15 levels.

The New Zealand Dollar touched a more than two-year low against the US dollar in July. Weakness in the Kiwi picked up last week following a more dovish Reserve Bank of New Zealand. Expect to see upsides capped in the cross at 0.6850 levels.

And finally – weakness in gold has continued this month with the precious metal hitting 2018 lows at 1250 levels on the DGCX. I maintain a bearish Gold bias and find good value in building short positions above 1290 levels. 1235 levels must hold to protect against a sharper downside move towards 1204, which will form the lower support level through the month of July.

Gaurav Kashyap is a market strategist at Equiti Global Markets

The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti.

Tags: US China

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