Trade War Truce Impacts Forex Pairs

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Trade War Truce Impacts Forex Pairs

After months of trading hostilities between the US and China, the two global economic heavyweights finally reached a truce on Saturday. During sideline talks at the G20 Summit, presidents Trump and Xi agreed to suspend the retaliatory tariffs for 90 days to allow for negotiations.

In a press release, the White House stated that the US had managed to coerce China to reduce the trade deficit by buying more US goods and reign in on unscrupulous trade practices.

In return, the US had committed to suspend the tariffs stated for January 1 to facilitate negotiations. The statement stated that the tariffs would be implemented if the two sides failed to reach an agreement.

The Effect On US dollar

Some Experts had predicted that the easing of tension between the two countries would strengthen the dollar and improve the valuation of Asian stocks. However, the immediate effect of the truce has been the weakening of the dollar and the Yen as investors increased appetite for risky assets.

Indeed, it was the volatile currencies such as the Aussie and Kiwi dollar that recorded the most improvements while stable currencies such as the Yen weakened.

The dollar index relative to six major currencies had already fallen by 0.36% to 96.92 by Monday morning. The US dollar lost to the Yuan, the Rand, and the Mexican peso while the Yen hit a new low of 113.85 against the dollar. Meanwhile, the Euro gained 0.3% against the Yen and the dollar to trade at 128.84 and $1.1350 respectively while the Sterling pound gained marginally against the dollar.

Experts attribute the risky trading behaviour to the fact that currency investors no longer see the dollar as a safe bet. Traders now view riskier currencies such as the Kiwi and the Aussie as holding better short-term prospects. They predict that crosses involving the Yen for the Aussie and the Kiwi will record increased activity as traders absorb the implications of the truce. This tread is likely to continue as traders shun the dollar for less liquid currencies that are likely to be stable in the short term.

U.S and China Trade Truce Market Consequences

Trade War and sanctions Talking Points:

  • Growth slowdown in Europe may push ECB towards a dovish stance
  • Potential Trade war truce quadruples MSCI
  • Maduro regime may potentially be pushed out by overwhelming sanctions

With Thursday’s ECB meeting and the German economy facing a slowdown, the truce might push the economy down further. The MSCI shows great promise as new foreign capital is injected, bringing the yuan to its highest level since July. Venezuela continues to suffer from sanctions as the Maduro regime holds on for dear life.

EUR/USD Hitting 13-Day Moving Average

U.S and China Trade Truce Consequence

With the ECB soon coming together for their meeting in Frankfurt, it seems more likely that there will be a dovish stance since the European economy has been negatively affected by the US and China trade war.

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There’s a high likelihood that president Trump and President Xi Jinping will reach an agreement, which will impact many countries. The agreement would involve an increase in U.S product purchases, which as a result, would mean less exports from other countries. For instance, economists at Barclay have stated that they estimate a 20% decrease in exports to China. For Europe, that would mean that they would see an estimate of 2.2% drop in their exports. With Germany already struggling with demands, this will negatively affect their economy and a factor that contributed to today’s 0.40% drop in euro. As shown in the graph above, the EUR/USD price is at its 13-day moving average. If the price moves lower past the moving average, this may lead to a potential downward trend.

MSCI Plans to Quadruple China’s Weighting

The extension deadline given by president Trump to make a deal with China encouraged foreign capital inflow, which is why the yuan has grown stronger with an open price of 6.7, highest it’s been since July.

CNY Opening Strong for 2020

With uncertainty decreasing and the outlook being positive between the U.S and China, the yuan may continue to appreciate. As a result of the potential trade truce, the MSCI has experienced its greatest gain since last week due to potential foreign capital inflow. MSCI has stated that it expects 80 billion new foreign funds to flow in. The global index plans to increase Chinese large cap stocks to 20% from 5% and increase the weight of Chinese stocks from 0.7% to 3.3%.

However, the growth prospect of the yuan may change by the end of the year since China does not have the same stability as the U.S. The increase in new yuan loans has increased debt further leading to a higher debt-to-GDP ratio. As mentioned in my previous article “ How to Know If You Are Invested in the Right Emerging Market ”, a debt-to-GDP ratio exceeding 4% is a sign of danger and should be a reason for concern.

Geopolitical Update

The president of Venezuela’s central bank, Calixto Ortega seemed to be missing for weeks and it was later found that he had left the country discretely to buy some time. He tried to negotiate with Venezuela’s allies in order to bring forth some funds to survive against the sanctions. With 90% of their economy relying on crude oil and U.S accounting for approximately 41% of their exports, there’s a low probability that they will be able to have enough funds to cover their crisis. This may finally push the Maduro regime out.

Written by: Nancy Pakbaz, CFA

Follow Nancy on Twitter @NancyPakbazFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

5 Forex News Events You Need To Know

In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.

Trading technical chart patterns can be extremely profitable but one must always be aware of the fundamental story which is ultimately driving the markets. Below we have listed five of the most important News Releases/Economic Indicators you need to know right now!

Top 5 Market News Events

1.Central Bank Rate Decision

Each month the various Central Banks of the world’s economies meet to decide over the interest rates they are responsible for. The decision they have to make is whether to leave rates unchanged, raise rates or lower rates and the outcome of this decision is extremely important to the currency of the economy and as such, to traders.

An increase in rates is generally seen as bullish for the currency (meaning it will increase in value) and a decrease in rates is generally bearish for the currency (meaning it will decrease in value) whilst an unchanged decision can be either bullish or bearish depending on the perception of the economy at the time.

Whilst the actual decision itself is crucial, so too is the accompanying policy statement here the Central Bank gives it’s overview of the economy and how they view the future outlook. This is also where monetary policy is announced, which concerns vital matters such as the implementation of QE, which we explain thoroughly in our Forex Mastercourse.

Some of the best trades you can make come from rate decisions, for example, since the ECB cut the EuroZone rate to 0.05% in September 2020, EURUSD has since fallen by over 2000 pips.

The Gross Domestic Product is an important indicator of economic health in a country. A country’s central bank has expected growth outlooks each year that determine how fast a country should grow, as measured by GDP.

When GDP falls below market expectations, currency values tend to fall and when GDP outdoes expectations, currency values tend to rise. As such this figure’s release is keenly observed by currency traders and can be used to cautiously anticipate Central Bank movements.

When Japan’s GDP shockingly shrunk 1.6% in November 2020, the JPY fell sharply against the Dollar as traders anticipated further Central Bank intervention.

3.CPI (Inflation Data)

Consumer Price Index is the most widely used inflation measure out of the various economic indicators. The index gives information about the historical average prices paid by consumers for a basket of market goods and highlights whether the same goods are costing more or less for consumers.

Central Banks monitor this release to help guide them in their rate and policy setting. If inflation is seen to be evident, and moving beyond a certain target then interest rate rises are used to counter this.

In November 2020, Canadian CPI beat market expectations of 2.2% and came in at 2.3% with Canadian Dollar subsequently traded up to a six year high against the Japanese Yen.

The unemployment rate of a country is crucial to markets given its importance to Central Banks as an indicator of the health of an economy. Higher employment leads to interest rate rises as Central Banks aim to balance inflation with growth and as such this figure draws huge market attention from traders.

Alongside the Unemployment rate the two most important labour statistics are the US ADP and NFP figures released each month with the NFP taking prime position. This figure is so important we do an NFP preview each month giving you our analysis on the release and how to trade it. Given the market’s current attention to the likely date of a Fed rate hike, this figure is growing in importance each month.

The ADP data is considered an important predictive tool for the NFP as it is released beforehand.

Although the Central Bank meetings of all economies are extremely important, America’s Federal Open Market Committee meeting takes canter stage as the US Dollar is currently the world’s reserve currency.

Each month the committee meets to set rates and to give it’s pronouncement on current economic conditions and the effectiveness of current monetary policy, casting an eye forward to expectations of future economic conditions and adjoining monetary policy.
The committee is made up of members which vote at each meeting with “Hawkish” members those in favour of a rate rise and “Dovish” members those favouring a lowering of rates.

The statement released by the Committee is keenly scrutinized by traders looking for clues as to how the Central Bank will behave in future and even the most seemingly inconsequential of terminology can cause large market moves, as seen recently concerning the Fed’s usage and then removal of the term “patient”, regarding rate hikes.

FOMC meetings can cause huge market volatility as seen on March 18th 2020 when EURUSD spiked up 400 pips in a matter of minutes as markets perceived the meeting to be USD negative.

These Central Bank meetings are where we also learn about any changes in monetary policy, such as the announcement of quantitative easing. This is extremely important to currency traders and we explain this topic fully within our course.

Since the ECB announced their latest QE program on Jan 22nd of this year, EURUSD has fallen by over 600 pips

The key thing with all economic indicators and news releases is not just what the actual release means but how the market anticipates the release and subsequently reacts to it, this is where the trading opportunities are created. It can be extremely difficult for new traders seeking to trade news events as the volatility and uncertainty can be overwhelming, fortunately we have a fantastic suite of indicators which are perfect for trading news events.

All comments, charts and analysis on this website are purely provided to demonstrate our own personal thoughts and views of the market and should in no way be treated as recommendations or advice. Please do not trade based solely on any information provided within this site, always do your own analysis.

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