Monetary policy and macroeconomic reports were off the market’s focus last week as global investors were nervous regarding rising tensions between the two largest world’s economies. The United States and China had worsened the mutual relationships as trade talks failed to arrange the deal promised in November last year. Moreover, the Chinese officials did not express any interest to conclude the negotiations process after U.S. President Donald Trump imposed new tariffs for Chinese imports. Instead, the Sino government promised to retaliate, implementing mirror measures for U.S. goods imported in China worth $60 billion starting from June 1. The most significant drop was noticed in global equities on Monday after the weekend headlines showed both countries are getting ready for a stricter confrontation. U.S. stock indices were sold off with 2.5% daily losses on average. Although traders found support for major benchmarks throughout the trading week, the overall risk-off sentiment kept pressuring the financial markets across the globe. Safety flows were increased as U.S. 10-year Treasury yields dropped to the lowest value in six months.
The world’s reserve currency - the U.S. dollar - was bid throughout the trading week, staying flat or strengthening versus all major peers. Fundamentally, analysts forecasted that the negative impact from trade wars on the U.S. economy would be the lowest among developed countries as the latest data remained robust. Although export and import prices fell in the U.S., and the Retail Sales report declined in April, the Housing sector picked up the growth momentum, while the ISM Manufacturing index showed sustainable economic expansion. The rebound in stock indices helped the greenback to gain strength, while its role of the reserve currency was weighing on traders’ sentiment. Weakness in many regions helped the greenback as well. USD/JPY had also reflected the equities’ bounce, and the pair recovered most of its mid-week losses after the failed test of 109.00 support.
The Chinese yuan led the losses in emerging markets currencies, while such majors as Sterling, Euro, the Australian and New Zealand dollars plunged simultaneously. The single European currency was mainly vulnerable to global economic slowdown concerns as there was no significant flow of data from the Eurozone this past week. German GDP report declined slightly on a monthly basis but remained flat year-over-year. French CPI jumped, EU GDP came in unchanged, while employment report and trade balance update improved somewhat. Nevertheless, EUR/USD failed to hold gains above 1.1250 handle, reversing the two-week uptrend and falling steadily five days in a row. The pair’s slide was extended after breaching the 1.1200 round-figure support and quote kept sliding 1.1157 weekly lows. If the upcoming week’s EU data was soft, we could see the Euro testing 1.1000 support versus the greenback.
The Sterling had lost the ground versus USD, JPY, EUR and CHF. Brexit talks were in the market’s focus again as Premier Minister Theresa May was trying to arrange the fourth vote in Parliament to conclude the deal with the European Union. However, the British Parties failed to find a political compromise, the agreement was cancelled, and investors lost patience to support the currency. Even though the labour market data was slightly positive compared to the worst-case scenario, and the unemployment rate dropped in April, GBP/USD lost more than 2% of the exchange rate. Technically, the pair is stuck above the support level at 1.2700, but even a test of 1.2600 would not be something extraordinary for the Sterling as the bearish momentum is sustainable and there are no signs for a potential bullish reversal, especially in the light of greenback’s strength across the board.
The Australian dollar hit 4-month lows this past week on the back of macroeconomic disappointments, global trade uncertainty and the Bank of Australia officials’ dovish comments. Most likely, the regulator will cut the interest rates next month as the market already priced in 69% of chance for the softening. Moreover, RBA could start getting ready traders for another rate cut in autumn this year as the economic growth is concerning the regulator. The AUD/USD currency pair finished the trading week at 0.6868, and further slide toward 0.6750 is possible in the week ahead. The New Zealand dollar was also trading on the weaker bias, but its losses were more moderate as the RBNZ’ rate cut has been already played out by the currency speculators, and the fundamental environment slightly increased. The Kiwi’s role of a risk currency could keep weighing on the selling pressure as the U.S.-China trade wars would hit the country as well.
The Canadian dollar held a position than its Australian and New Zealand counterparties due to several fundamental reasons. First, the local economy showed stronger-than-expected results recently with the labour market in good shape, consumption and spending increased, while the housing market and manufacturing PMI were positive. Second, even though WTI Crude oil price did not reach such fast growth pace as at the beginning of the year, the overall market’s sentiment was positive for the black gold. Consumption in the U.S. increased, and some of the traders were pricing in possible tensions and supply shortages in the Middle East. The oil prices tested $63.60 resistance but slid towards $62.50 per barrel at the end of the trading week. Nonetheless, that price action supported the Loonie. Even though the USD/CAD currency pair had tested 1.3500 high for the fourth time this month, further gains are unlikely, and the quote could drop below 1.3400 next week on the back of hawkish expectations for the Bank of Canada. The regulator’s meeting and rate decision are scheduled for the week of May 27, and the central bank would need to find lots of excuses if the interest rates remained unchanged. Traders will pressure on the BoC governor Polos to tighten the financial conditions in Canada, and if that happened, the Loonie could soar versus not only the greenback but also other week opponents such as the Sterling, the Aussie and Kiwi. For example, GBP/CAD had already lost 3.27% of its value in two weeks, and the weakness could continue further.
In other markets, gold prices were vulnerable to a volatile action this past week. Initially, investors dived deep into the safe-haven precious metal, and the gold price jumped above $1300 per ounce. However, profit-taking flows and softer demand for long-term savings pushed price back lower. XAU/USD plunged again below the resistance and extended losses toward $1277 per ounce. Silver fell more than 2.5%, following gold on the bearish slide. Most of the industrial metals, including palladium, copper and aluminium, dropped as well. Traders were rushing to get rid of the high-risk asset class amid growing fears of a global recession and trade war concerns.