30.08.2019 09:19 AM
Trade war drags the US and China into the abyss (high risks of continuing the fall of AUDUSD and NZDUSD pairs)

The mood on world markets improved slightly again amid confirmation of reports that US-Chinese trade negotiations had indeed resumed. But is it really worth taking this news seriously?

Investors continue to show their high expectations and hopes regarding the achievement of a new trade agreement between Washington and Beijing and an end to the customs duties war. However, the issue of agreement remains open. Everything that happens around this topic does not really resemble any local trade contradictions, but Washington's real aspirations, using measures of economic influence - customs duties, claims against major Chinese companies like Huawei, as well as obvious political pressure manifested in the use of the rhetoric that China is the main geopolitical enemy of the United States, trying to restrain the growth of China's economic and geopolitical dominance.

Given just such a subtext of the trade war, and it just begs, it can be said that an agreement can only be achieved if either one of the parties openly wins this confrontation, or when they are so weakened by the struggle that they will be forced to go to broad compromises.

Such difficult prospects will not bring anything good to the financial markets, as they will plague investors with their uncertainty and high financial risks. For China, this threatens a fall in income from trade with America, and for the States, the risk of higher inflation, which, given the prospects for a falling economic growth, will replace the era of its stagnation with a steady period of high inflation. In this case, in the event of falling American incomes and high import tariffs, investment activity will slow down. The status of the dollar as a world reserve currency will gradually melt, and with it the attractiveness of the dollar.

But, despite such a pessimistic view, these are still distant prospects, if the confrontation between Washington and Beijing does not end at a peculiar red line, beyond which lies the abyss.

In the meantime, in our opinion, the parties believe that they still have gunpowder to fight each other. The tug of war will continue, which will be a good reason for high volatility in the markets, accompanied by sharp changes in moods from positive to negative and vice versa. In this situation, the US dollar will maintain approximately its current position, since its real decline against major currencies will be compensated, in turn, by weakening of their exchange rates by the national Central Bank. It seems to us that this situation will continue in the short term.

Forecast of the day:

The AUDUSD pair remains in a short-term downward trend amid the trade war between the United States and China. We expect its decline to continue to 0.6675.

The NZDUSD pair also remains hostage to the trade crisis between the United States and China. We believe that the pair will continue to decline to 0.6245.

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Pati Gani,
Esperto analista di InstaForex
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