Middle East Tension Rises amid Trade War
- 21 May 2019
Fundamental Outlook Last Wednesday, U.S. President Trump announced a national emergency on protection of American technologies. Chinese telco giant Huawei Technologies Co and its affiliates have been added to the Bureau of Industry and Security (BIS) and making local corporations more difficult to deal with them. Market critics cite China could use many ways to retaliate U.S. by making American companies difficult to progress in China’s jurisdiction.
President Trump announces the removal of tariffs on aluminum and steel on Canada and Mexico. On the other hand, trade talk between U.S. and China has stalled as both countries have not scheduled any date for further negotiation. Chinese Yuan is devaluing rapidly since 5 May after U.S. Government announced the trade tariffs on Chinese imports.
China retaliates to U.S. trade policy by announcing the increment of tariff on USD60 billion worth of U.S. goods from 1 June. As the trade conflict rises in tension, the USD/CNY has risen to 6.9 level and traders are observing for impending intervention by Beijing Government as the exchange rate approaches 7.0 benchmark. Shanghai Composite Index has fallen back to 2900 region from recent top 3288.
China reduced its holding on U.S. treasuries by USD20.5 billion in March and cut down to USD1.12 trillion. This is at lowest level in 2 years and analysts interpret China’s taking this action as negotiation tool for trade deal.
Tension in Middle East escalates as U.S. deploys warships and Saudi-led military action set ready for retaliation. Iran has claimed responsibility for the drone attack on Saudi’s oil infrastructure occurred last week.
Technical Forecast USD/JPY has bounced off 109.00 support as traders short-covered positions. Technically, the trend may begin to consolidate in narrow range from 109.00 – 111.00 region in coming week. Fundamentally, the trade conflict has caused Dollar to whipsaw against Asian currencies. Hence, risk control is advised if the trend extends beyond the aforementioned range.
EUR/USD trades in falling trend but has been constricted in narrow range from 1.1150 - 1.1270 region. This week, we forecast the trend may recover with strong support emerging at 1.1100 area. Market sentiment is unclear with compression of range from 1.1100 – 1.1250 region. Observe the USD Index (USDX) for a potential inverse correlation.
GBP/USD has been dropping last week as BREXIT conflict rises. Prime Minister May has announced she will make an exit if the fourth BREXIT deal is rejected by the Parliament. Market has broken and closed below the 1.2800 support on Friday. This week, we predict the bears will dip further but will encounter short-covering at 1.2550 – 1.2600 region. Resistance will emerge at 1.2800 level in case of reversal.
Gold prices topped off USD1303 /oz and closed below USD1280 /oz on Friday as Dollar has strengthened. This week, we expect the trend to be mixed as the support will emerge at USD1265 – USD1270 /oz area. Overall range will be contained from USD1265 – USD1285 /oz this week but risk needs to be controlled in case the trend breaks beyond the constriction.
WTI Crude prices have been trading in narrow range and hovering around USD62 /barrel throughout whole week. Market trend is uncertain due to the rising tension in Middle East conflict between Saudi and Iran. This week, we reckon the directional trend may move in either headway due to the Dollar trend. Initial range is expected from USD61 – USD64 /barrel but breaking in either direction will attempt USD59 /barrel on downside or USD66 /barrel on upside.
Silver prices have broken below USD14.80 /oz support last week. This week, we foresee the bears will take another stride and test USD14.00 /oz before it rebounds Overall, the trend is expected to be contained from USD14.00 – USD14.60 /oz this week amid mixed trading activity.
Crude Palm Oil (FCPO) Futures on Bursa Derivatives traded higher after rollover to August19 contract. Trading volume has increased amid flat open-interest due to weaker Ringgit. August19 Futures closed at RM2096 /MT on Friday. This week, we foresee some early pull-down in demand before resuming uptrend towards Friday. Range is expected from RM2040 – 2120 /MT region.
DAR Wong has 30 years of trading and hedging experiences in global financial markets. The opinion is solely at his own. He can be reached at email@example.com