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Politically Charged Trade News Rocks FX

  • Kathy Lien
  • 11 January 2018

Daily FX Market Roundup 01.10.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

Political jockeying and trade war threats rocked the foreign exchange market today as the NY session kicked off with a steep slide in the U.S. dollar.The meltdown in the greenback was triggered by reports that China is looking to slow or halt their purchases of U.S. Treasuries.  The Bloomberg story claims that "people familiar with the matter" say Beijing officials are reviewing the country's foreign portfolios and suggesting that the world's largest holder of U.S. Treasuries start looking elsewhere for opportunities. China has sold Treasuries and reduced their purchases in the past (2016 in particular) but this is the strongest headline we've seen on the issue to date. 

While these comments do not come from Beijing officially, the fact that they weren't denied is a sign of the government's endorsement. Trade tensions are also a motivation.  China's appetite for U.S. Treasuries has long been both a political and economic issue so there's never a coincidence in the timing of these announcements.  With the Commerce Department expected to recommend whether a steel and aluminum import tariff should be implemented (a move directed at China), this could be a politically charged decision. As the U.S. Treasury is poised to boost its debt supply significantly in 2018, if China stops buying Treasuries, the bull market in bonds is officially over.  Treasury prices will collapse, yields will skyrocket and the dollar will fall.  As we've seen today, USD/JPY will be hit the hardest as we could easily see the pair trade down to 109.00 especially as short yen traders cover their positions.  For the time being however, the next stop for USD/JPY should 111.00 with the move possibly extending down to the November low of 110.85. 

The Canadian dollar fell 100 pips against the U.S. dollar in a matter of minutes on the back of a Reuters report that Canadian government officials believe that President Trump will pull the U.S. out of NAFTA in the very near future. Minutes later the White House denied these claims, saying Trump has not changed his position.  Also, after the initial release Politico was told by a Canadian government official that "it is inaccurate to say that the Government of Canada is convinced that the U.S. will soon pull out of NAFTA" as progress "was made during previous rounds and the December intersessional and we expect more progress to be made in January." You can never tell who to believe but the swift WH denial suggests that Trump is in no rush to make a decision.  The next round of NAFTA talks begins on January 23rd.  For this reason, we believe that the rally in USD/CAD should be faded especially with oil at 2 year highs, the U.S. dollar weakening and the Canadian economy roaring.  Technically, USD/CAD has significant resistance above current levels with the 100-day SMA capping gains below 1.2600 and the 200-week SMA hovering below this same level. So USD/CAD either holds below 1.2595 or soars up to 1.27. 

In contrast, the Australian and New Zealand dollars performed well thanks to U.S. dollar weakness with NZD/USD hitting a fresh 3-month high. Australian retail sales are scheduled for release this evening and the weakness in wage growth along with the softer sales reading in the PSI point to a downside surprise for the report.  Economists are looking for sales growth to slow to 0.4% from 0.5% in November but we believe that the change could be more substantial.

Meanwhile euro ended the day up against the dollar, but well off its highs while sterling traded lower.The ECB publishes the "minutes" from its December meeting tomorrow and we think the report will highlight the improvements in the Eurozone economy.  Sterling traded lower amidst mixed data - industrial production numbers were stronger, the trade balance was weaker. 

 

 

For more information, they can be reached at http://www.bkforex.com/.

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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