After a short pause, China has taken a number of retaliatory measures to increase import tariffs from the United States. Starting June 1, duties on goods amounting to 60 billion will be raised and despite the fact that US exports to China are significantly inferior in terms of imports, measures taken by China are more than serious for the American economy.
The urgent negotiations, which took place on Friday after the preventive actions of the United States, ended in vain. Panic is growing in the markets, which is about to turn into a full collapse. The S&P 500 fell by 2.41% to 2812p, as well as the Nasdaq lost 3.4%, and the US and Japan stock indexes went deep into the red zone. Only the Chinese Shanghai Composite at the auction on Tuesday shows a slight increase since the main negative factors for China were recouped a little earlier.
China's response may force the Fed to begin monetary policy easing this year as Boston's head of the Federal Reserve Bank Rosengren immediately informed in an interview with Reuters. If the parties fail to make a mutually acceptable decision in the very near future, then the whole effect of Trump's tax reform will be leveled and the growth rate of the budget deficit will increase. In the Chinese media, a discussion is unfolding on the theme of the mechanism for dumping American treasures and if events follow a negative scenario, the United States will face the likelihood of a sovereign default.
As a result, there is a danger of a further fall in risky assets and an increase in demand for defensive assets. Gold futures in June climbed to $1,300 while the yen updated a three-month high. The lack of positive news will not stop the negative trend. The currencies of commodity countries will remain under pressure despite the relatively stable oil prices.
NZD / USD pair
The New Zealand dollar continues to sell off, having no current serious reasons for the resumption of growth. The RBNZ reduced the rate by 0.25% last week, citing a slowdown in global and domestic growth, which significantly lowers its GDP short-term outlook. RBNZ's plans to lower the rate once again this year are still unclear. In any case, the regulator itself left behind a 50% chance of another step, which suggests the cyclical processes in the economy will make it possible to count on GDP growth after 2 quarters.
At the same time, market expectations are more negative. In particular, ANZ Bank predicts another rate reduction in November and another one in the first quarter of next year.
No matter how the events develop in the trade war between China and the United States, New Zealand will inevitably be affected in the event of an escalation. Even a one-time reduction in the Fed rate in the fall will not change the dynamics of the spreads between US treasures and New Zealand government bonds, narrowing the spread will reduce the need for kiwi, which will sell off more intensively than the possible weakening of the dollar.
On Tuesday morning, Kiwi adjusted to the resistance of 109.70 and sales are likely to resume near this level. The immediate goal is 108.49, which can already be achieved this week.
AUD / USD pair
The fundamentals of Australia continue to deteriorate. Moreover, the demand for housing is declining, which is reflected in a decline in investment in construction and mortgage lending (-3.7% and -2.5% in March). The confidence indices in the business environment from NAB Bank declined again in April and the decline has become chronic.
NAB notes a sharp drop in the employment index. The volume of new orders also decreased and the use of production capacity was reduced. In regards to the price pressure, it has weakened, which threatens both inflation and consumer demand in general.
Despite the fact that the RBA left the rate at 1.5% during the last meeting, forecasts imply two cuts in the current year, since inflation remains at an extremely low level of 1.3%. Under emerging conditions, an Aussie has no chance of resuming growth while bearish pressure remains strong despite being oversold. The immediate goal is 0.6880/90 and any growth will be used with high probability for large sales.