EUR/USD is consolidating ahead the important events

While the Americans are celebrating the Independence Day, investors from other countries are discussing trade wars. The trade war start on June 6 makes such important events as the release of the FOMC meeting’s minutes and the report on the US labour market less significant. That is the date when the import tariffs on Chinese goods worth $34 bn come into effect. If China dares to retaliate, Donald Trump will add another $200 bn of tariffs. Next, there will be another $200. Anybody will worry about such prospects. And Beijing worries.

According to China’s customs agency, in yuan terms, the data showed growth in Chinese exports to the U.S. ticking down to 5.4% Y-o-Y in the January-June period. It was about 5.8% over the first five months of 2018. Although critics blame China for the irrelevant data and suggest waiting the trade figures in dollar terms, China can well start reducing its foreign trade surplus, administratively constraining its export. At the same time, according to Reuters reliable sources, Beijing is negotiating with the EU in order to form an alliance against the US protectionism. Brussels has yet rejected the idea, emphasizing the idea to develop a duty-free zone to trade vehicles among the EU, the USA, Japan, and South Korea.

One of the ways to fight Donald Trump’s threats is devaluing yuan. USD/CNY has really hit its 11-month high; however, I, personally, think the main reasons for the rally are different paces of the economic expansion in these two countries and the divergence in monetary policies. The People’s bank perfectly understands the results of further yuan devaluing – the capitals outflow. According to the Institute of International Finance, after a long inflow of foreign capitals into mutual investment funds, $620 million was withdrawn in the second half of June. Anyway, the risks of slowdown in China’s economic growth and the monetary expansion allowed foreigners to buy out China’s national debt at the highest speed since September, 2016.

Dynamics of Chinese stocks and yuan

Source: Bloomberg

There are no signs of panic like in August, 2015, or January, 2016. Especially since the governor of PBOC Yi Gang said he was carefully monitoring the situation in the exchange market and was willing to apply the entire wide range of tools to keep yuan stable.

The single European currency is supported by a faster growth of produce prices, at 3% Y-o-Y in May, which is the best result over this year; as well as by easing of the political risks in Germany. The ECB, with its loyalty to ultra-easy monetary policy, German and Italian events allowed speculators to increase their euro shorts up to the highest level since Emanuel Macron became French president. Haven’t they been too much?

Dynamics of euro short positions


Source: Bloomberg

Before the important economic reports are released and the import tariffs on Chinese goods worth $34 bn come into effect, EUR/USD is consolidating in the range of 1.152-1.172. Looks like the calm before the storm.

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Price chart of EURUSD in real time mode

Dollar: Calm Before Storm

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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