US/China trade war heats up. China retaliates with $60bln in new tariffs effective June 1

Summary

• USDCAD: Global markets are in risk-off mode to start the week as President Trump dials up trade tensions with China over a series of new tweets.  Over the weekend, the Chinese foreign ministry said that China would take a “wait and see” approach on retaliatory measures in response to Friday’s increase in tariffs from the US, but more importantly said that it would “never surrender to foreign pressure”.  China has a limited ability to impose the same scale of tariffs on the US given that they import far less than the US, and so some in the Chinese press are speculating that China may direct “precision strikes” at vital links in the US economy (agriculture perhaps?).  President Trump, in response, tweeted that “we are right where we want to be with China” and that “China should not retaliate – will only get worse.”, and with all this we’ve now seen the S&Ps fall 40pts and the Chinese yuan collapse once again.  One would expect USDCAD to be fairing better this morning amidst the broad risk-off tone, but we’re seeing crude oil prices trade 2% higher this morning after Saudi Arabia said two of its oil tankers were attacked on Sunday near the Straight of Hormuz in the UAE, and so oil supply fears are keeping USDCAD confined to chart resistance in the 1.3430-60s at the moment.  The leveraged funds at CME didn’t do much during the week ending May 7th, leaving their net long USDCAD position largely in the same place it has been now for three months.  This week’s North American economic calendar features the April US Retail Sales and Canadian CPI figures on Wednesday:

Monday: Bank of Canada’s Lane speaks on a panel at 5:30pmET at the French and German embassies in Ottawa
Tuesday: Fed’s Williams and George speak.
Wednesday: US Retail Sales (April), Canadian CPI (April), US Industrial Production (April)
Thursday: US Housing Starts (April), US Philly Fed (May), Canadian Manufacturing Shipments (March), BOC’s Poloz speaks
Friday: US Michigan Consumer Sentiment Index (May)

We think USDCAD’s ability to shake off Friday’s best ever Canadian employment report was quite impressive, and we think the daily chart could repair itself with a move back above the 1.3460s.  Failure to regain this level however should keep the pressure on, and a create a more mixed technical outlook heading into Wednesday.  We don’t think Friday’s stellar jobs report out of Canada will be enough to get the Bank of Canada to remove its cautious outlook.

• EURUSD: Euro/dollar has had a relatively quiet start to the week; it tested Friday’s trend-line support level in the 1.1220s and once again found buyers.  China has just retaliated and said that it will raise tariffs to 25% on $60bln of US goods (2493 items to be exact) effective June 1st.  The S&P futures have now fallen another 15pts quickly, June gold prices have popped $4, and EURUSD is seeing a rush of buying.  We said this last week and we think we have to say it again…with EURUSD traders continuing to show resilience to global risk-off flows and instead choosing to follow gold prices higher, we think there’s a growing risk of a strong short covering rally here.  The funds left their net short EURUSD position largely intact during the week ending May 7th, and we think this could add fuel to the fire as this net position hasn’t changed much for the last five weeks.  This week’s European economic calendar features some key German data points:

  
  Tuesday: German CPI (April), German ZEW survey (May), Eurozone Industrial Production (March)
  Wednesday: German GDP (Q1), Italian Industrial Sales (March), Eurozone GDP (Q1), speeches from ECB’s Coeure and Praet
  Thursday: Italian CPI (April), speeches from ECB’s Coeure and De Guindos
  Friday: Eurozone CPI (April)

• GBPUSD: Sterling is struggling to find direction this morning, but traders appear to be following EURUSD higher here as the Chinese start to retaliate.  We’re now trading back above chart resistance in the 1.3020s, which opens up the door to the 1.3050-60s now in our opinion.  The funds retain a small net short position in GBPUSD as of May 7th.  Brexit talks stagger on, but the Tory and Labour parities remain far apart, according to the Washington Post.  More here.  The UK reports its employment report for March tomorrow morning, but we think traders will gloss over it.

• AUDUSD: The trade-sensitive Australian dollar has slumped lower to start the week as the Chinese yuan and copper continues to get sold.  However, the latest headlines about the Chinese retaliating with new tariffs as of June 1st has not seen a fresh wave of CNH selling, and so we think some AUDUSD shorts are using this as a queue to cover for the time being.  The buying has inched AUDUSD desperately back above chart support at the 0.6965-70 level as NY trading gets underway today.  The funds marginally trimmed their net short AUDUSD position during the week ending May 7th, but this position still remains close to 18 week highs.  This week’s Australian economic calendar features the nation’s employment report on Wednesday night, plus we have the Australian national elections this upcoming Saturday.

  
  Monday night: NAB survey (April) at 9:30pmET
  Tuesday night: Westpac Consumer Confidence (May)
  Wednesday night: Australian Employment Report (April)
  
  We think the entrenched AUD short position will want to see a disappointing employment report out of Australia this week, and we think this will be an important data point because it appears to be the last pillar of strength in the Australian economy that is preventing the RBA from cutting interest rates right now.

• USDJPY: Dollar/yen is hemorrhaging losses this morning as the US/China trade war takes a turn for the worse.  The S&Ps are now trading down 60pts, and have broken below chart support at 2836.  US 10-yr yields are attacking the low 2.40s.  The next major chart support level, that we mentioned on Friday, is now getting tested (109.05-15).  We think the selling could be become panicky should this level break to the downside.  The funds trimmed their net long USDJPY position during the week ending May 7th as shorts added and longs reduced length a little bit, but we think not enough was trimmed overall and this part in parcel explains why USDJPY is puking lower today.  It’s all about the next phase of the US/China trade war right now and things are not looking for global risk sentiment at this hour.

Tune in @EBCTradeDesk for more real-time market coverage.

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About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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