The escalation of the trade conflict between the United States and China completely determines the trends in the global economy. On Monday morning, Asian stock indexes are losing 1-2%, gold has updated a 6-year high, and oil is losing more than 1%. The trend is in favor of protective assets, which makes the yen a market favorite and will increase pressure on commodity currencies.

The dollar in this confrontation does not look strong – the state of the American economy is far from ideal. This week, the dollar may lose some positions against most G10 currencies.

NZDUSD

The New Zealand dollar has updated its low since December 2015, reacting to the collapse of the markets after the speech of J. Powell and the introduction of retaliatory duties by China, which indicates a high probability of escalation of the trade war.

If we assume that the world stock markets are close to a reversal followed by a collapse, the kiwi has little chance to catch even this level, and a move to a 4-year low of 0.6094 looks very likely. But there are other factors, primarily the likelihood of another RBNZ rate cut in November. If markets decide that a decline is inevitable, the kiwi will continue to fall. If the probability of a pause becomes higher, it is possible to roll back up.

The question is not so obvious. RBNZ has already reduced the rate this year from 1.75% to 1.0%, which reduced the exchange rate of NZD, mortgage rates fell, and there is hope for growth in inflation and employment. At the same time, the spread between deposit rates and the key rate is growing, which increases the bank's costs of servicing deposits, while banks are forced to reduce mortgage rates and the cost of loans for businesses.

The growth of the spread leads to the fact that banks are forced to reduce lending, which leads to a decrease in economic growth. If we reduce deposit rates, households cease to hold funds on deposits, which again leads to a decrease in the resources of banks for lending to the economy.

New Zealand has never lived at such low rates that are already close to an effective low limit, so a rate cut of another 0.25% in November, which most experts predict, doesn't really look inevitable. So, the kiwi will have a chance to grow a little. However, it is unlikely that growth will resume in the short term. At the moment, there is no reason for a reversal, a fall to the intermediate support of 0.63 is much more likely.

AUDUSD

The minutes of the RBA meeting on August 6 indicates that the Central Bank went into standby mode after two rate cuts this year. According to the text of the protocol, "Australia will need a long period of low-interest rates to make progress on employment and inflation," and the RBA will return to considering another rate reduction if the economy, and especially the labor market, turns out to be weaker than expected.

A bleak future may come faster than the RBA suggests. The PMI indices look weak in August, and if the manufacturing sector is still in the expansion zone after a long but slow decline over three years, then a decline in the services sector from 52.3p to 49.5p is the second trip below 50p this year.

At the same time, the RBA forecasts GDP growth of 2.5% this year, 2.75% in the next and 3.0% in 2021. This rather strange confidence in the future has some reasons – low-interest rates and the exchange rate of the AUD is able to revive business activity, the positive effects of the recent reduction of the income tax.

In any case, the RBA has no reason to be optimistic, especially if global trends remain the same. The aggravation of trade contradictions between the US and China will inevitably hit all the main trading partners of the two countries, the fall in the stock market leads to a decrease in the consumption of raw materials, and the descendant of commodity currencies will not be able to get out of pressure. AUDUSD is down, as we expected in the previous review, support of 0.6734 has turned into resistance, a test for the strength of a 10-year low of 0.6676 is almost inevitable.