The dollar had its best week in months as political concerns hobbled the euro. However, the renewed trade war between the US and China threw a wrench across risk assets late Friday. Stocks fell sharply, government bonds rallied, and the dollar initially sold off modestly, only to stabilize and bounce back in early Monday morning trading in Asia. There were no clear patterns in currency markets, as most major currencies sold off against the dollar in tandem. However, the worst-performing currency was the Brazilian real, down almost 4% as fiscal jitters return.
The continuing US federal government shutdown means there will be no first-tier economic releases this week out of the US. The European calendar is also light. Focus should therefore remain on the reignition of the trade war between the US and China, as well as the possibility of an agreement to reopen the US government. The labor market report for August and payrolled employees for September in the UK will also merit some attention.
AUD
Unsurprisingly, the Aussie dollar sank on Friday on the news that President Trump was said to be weighing a “massive increase” in tariffs on Chinese imports, and that he could cancel his planned meeting with President Xi. China is by far Australia’s largest trading partner, so the prospect of higher US tariffs on Asia’s largest economy is a clear downside risk. Whether Trump actually follows through with this threat is a completely different question of course. History suggests that there’s a good chance that he won’t, so we wouldn’t be surprised to see a reversal in the AUD/USD pair next week should it become clear that his remarks are more bluster than substance.
Domestic macroeconomic data out of Australia last week was at a premium, and mostly second tier for that matter. Focus this week will be on Tuesday’s RBA meeting minutes and Thursday’s jobs report for September. Another hold at the next RBA meeting in November is now more likely than not following the RBA’s hawkish hold in September, and we would probably need to see a rather sizable miss in the latter to bring one into view.
NZD
The RBNZ surprised markets last week by slashing interest rates 50 bps. While a rate reduction was expected, market pricing suggested an even money chance of a jumbo cut. Policymakers justified their unanimous decision by citing the sharper-than-expected contraction in Q2 and restrained economic activity. Despite inflation approaching the upper bound of the RBNZ's target (1-3%), the committee emphasized its concern over the downside risks that low domestic demand and unemployment pose to price growth.
The central bank also expressed openness to further ease its policy, with markets pricing in a consecutive rate cut in the November meeting. This week should be more quiet in terms of data releases, so the kiwi will probably take its cue from the US-China trade developments.
USD
The lack of economic data because of the government shutdown makes it much harder to gauge the state of the US economy, and there is no end in sight for now. For nw, markets don't seem to mind much, and appear far more worried about the flare-up of the US-China trade conflict. The US retaliated to China's imposition onf right epxort controls on rare earths in which it is almost the only supplier with an addiitional 100% tariff on the country, though implementation is delayed until November 1st to allow some time for negotiations. The initial reaction to the news was to sell the dollar, which seems to comfirm that investors do not regard trade wars as a dollar positive.
CNY
The quiet Golden Week period has concluded, and the US-China trade war is back in the news. On Friday, US President Trump declared an additional 100% tariff on imports from China and fresh export controls on ‘critical software’ from Nov 1. This came in retaliation after an earlier announcement by China to further restrict access to rare earths. Recent moves mark a clear increase in trade tensions, and a threat of an effective US trade embargo will likely remain a point of concern for markets for the time being.
Chinese equities in particular, which have performed very well in recent months, will most likely face pressure at the start of the week, and buyers may remain cautious unless tensions resolve. The yuan will also not get away unscathed. Its sell-off and trade tensions are likely to cast a shadow on other Asian currencies. Developments on the trade front will remain front and center in the coming days. Beyond that, the September trade and inflation data from China will be out. Most recent consumption numbers during the Golden Week holiday have only added to the sense of gloom, with spending per trip falling compared to last year.
