The trade and tariff dispute between the world’s two biggest economies has been part of the global financial market flow for just about a year.
During this time, there’s been a fairly consistent pattern where the AUD/USD will trade lower when the rhetoric between China and the US heats up and, conversely, the pair will then rally when negotiations appear to be making progress towards a resolution.
Over the last 24 hours, two developments have changed this market dynamic down under.
After yesterday’s domestic employment data almost doubled the number of new jobs expected, the AUD/USD raced to a two-week high of .7205. The pair then came under selling pressure back to .7160 after Westpac released a forecast calling for the RBA to lower the overnight rate by 50 basis points to 1.00% by the end of 2019.
However, late in the Asian session, Forex traders sold the Aussie below .7100 on the news that China will ban Australian coal from being imported into the Dalian operated ports. Coal was responsible for over AUD 60 billion in export revenue last year, with just over 20% ending up in China.
At this point it’s unclear if cutting off Australian miners from their biggest overall export market is a temporary measure, or part of a wider action aimed at retaliating against Canberra’s recent decision to side with the US in blocking Huawei Telecommunication from the local 5G network technology.
From a broader point of view, its been reported that a series of understandings are being drafted during this week’s US-China trade talks in Washington; an extension of the US tariff freeze past the March 1st deadline is a likely outcome.
On the other side of the coin, if meaningful progress was being made toward a comprehensive agreement to end the trade tariffs and 5G dispute over the next month, it’s unlikely that Australian coal exports would have been targeted.
From a technical perspective, the AUD/USD held support near .7050 twice earlier this month. The daily RSI is near 44.00 and pointing lower, which suggests the pair could trade below 70.00 without entering oversold conditions. Our trade suggestion to sell at .7215 was not filled, leaving us short from .7175. We suggest holding short from .7175 with an initial target of .6940 and a .7240 stop.
Yesterday’s Eurozone manufacturing PMI posted its first higher reading in six months at 49.2. This may been an early sign that the contraction on the continent is slowing, but it’s unlikely to see the 55.00 level reached last July anytime this year.
Today’s key data point will be the German Ifo business survey, which has also slipped lower over the last six months. A print below 98.00 will likely put renewed pressure on the single currency. We are currently short the EUR/USD from 1.1474. We suggest looking to sell the pair at 1.1385 with an initial target of 1.1160 and a 1.1445 stop.
The USD/JPY has traded above the 30-day moving average during every session in February so far. The last time the pair held above this technical indicator for this long was in April of last year. The steady rise in global equity markets has kept “risk off” selling out of the picture and the RSI at 58.00 is just above neutral.
The daily parabolic switch point has risen to 110.50, which could trigger a move back to the 30-day moving average line at 109.80. We suggest holding short from 110.40 with an initial target of 108.30 and a 111.65 stop.
According to Fitch ratings service, the lack of progress on the Brexit agreement was the primary reason for Wednesday’s decision to put the UK’s AA credit rating on negative watch. The House of Commons is scheduled to vote again next week on potential amendments to the Irish backstop.
The GBP/USD has shown punctuated periods of strength this week but was unable to hold momentum over 1.3100. Our short position from 1.2845 was stopped out at 1.2985 for a 140 point loss. We suggest staying on the side lines into the weekend and looking for another signal next week.
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