Sunday , May 19 2019
Home / BK Asset Management / China Strikes Back, FX & Equities Crash

China Strikes Back, FX & Equities Crash

Summary:
China Strikes Back, FX & Equities Crash Daily FX Market Roundup May 13, 2019 This morning, China announced new retaliatory tariffs on B 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 B, their tariffs are a fraction of the 0B 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

Topics:
Kathy Lien considers the following as important: , , , , , , , , ,

This could be interesting, too:

Kathy Lien writes How Low Can EURO, AUD, & GBP Go?

Kathy Lien writes The Weakest Currency of Them All…

Boris Schlossberg writes Risk Holds Steady Despite Chinese Threats

Kathy Lien writes Trump Spares Europe, But US Retail Sales Spell Trouble for USD

China Strikes Back, FX & Equities Crash

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.

Kathy Lien
Kathy Lien is an Internationally Published Author and Managing Director of BK Asset Management. Her trading books include the following: 1) For beginners, “The Little Book of Currency Trading (2010, Wiley).” 2) THIRD edition of the highly acclaimed, internationally published “Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2015, Wiley).” 3) Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley) 4) High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia)

Leave a Reply

Your email address will not be published. Required fields are marked *