The Week Ahead: China to post lower surplus – By Ipek Ozkardeskaya, Senior Market Analyst

 

The rising trade tensions between the US and China will likely remain on the back of investors’ minds next week. The Federal Reserve (Fed) doves are already claiming another rate cut in FOMC’s September meeting. The probability of a September cut jumped to 95% in the immediate aftermath of the July meeting, as Donald Trump imposed fresh 10% tariff on an additional 300 billion US dollar worth of Chinese goods. The US treasury yields slipped below 1.90% and gold tested $1450. With rising trade tensions, slowing global demand and waning investor sentiment, the safe haven currencies such as Japanese yen, Swiss franc and gold will likely remain in demand.

Any weakness in global economic data could further boost dovish Fed expectations.

UK 2Q GDP growth may have fallen to 0%

On Monday, the July final services PMI figures will be released in China, Eurozone, the UK and the US. While no surprise is expected in the majority of cases, the UK may require a closer look into this number, given that the services make up to nearly 80% of its economy and a slowdown in services PMI could be a sign of further distress as the likeliness of a no-deal Brexit becomes more plausible by the day, and such outcome could have a significant impact on the overall activity.

The Bank of England will release its meeting minutes on Wednesday. At its latest policy meeting, the BoE revised down its growth forecast to 1.3% in 2019 and 2020, from 1.5% and 1.6% respectively. Due on Friday, the industrial production data may confirm a decline in activity to 0.0% m-o-m in June from 1.4% printed a month earlier. Mark Carney said that the bank continues assuming a smooth Brexit, while insisting that a no-deal Brexit on October 31st would still be better than no Brexit at all, as the prolonged period of uncertainty is worse for businesses. In normal circumstances, the sharp depreciation in pound and the risk of a rising inflation would necessitate higher interest rates. But this seems unrealistic at a time when the UK is preparing itself for a no-deal exit, and the economic risks in the immediate aftermath of the separation need to be managed thoroughly.

On Friday, the second quarter GDP could have fallen to zero percent from 0.5% printed earlier. The year-on-year growth may have eased to 1.4% from 1.8%. Weak economic data could only fuel the Brexit worries, but the market is already pricing in the worst Brexit scenarios and tail risks. Hence a further decline in pound would come by no surprise and Cable could test the 1.20 support as the next stop of its race to the bottom.

RBA to stay pat, deliver dovish accompanying statement

The Reserve Bank of Australia (RBA) is expected to maintain its cash rate target unchanged at 1.00% at its Tuesday meeting and the monetary policy statement will be released on Friday. The RBA will likely deliver a dovish accompanying statement, with no real progress in the US-China trade talks and the gradually slowing global demand. Australian policymakers will leave the door open for lower interest rates in the coming quarters, to keep up with the pace of easing elsewhere, and most importantly in the US.

Due on Tuesday, the Australian trade data could print a higher surplus in June as iron ore prices consolidated at more than five-year highs in Qingdao despite global trade tensions.

German factory orders and industrial production

Later that day, the German June factory orders could confirm 0.8% m-o-m improvement in June versus -2.2% printed a month earlier. But on Wednesday, German industrial production data could show a 0.9% m-o-m decline versus +0.3% printed earlier.

Any weakness in Euro area’s growth engine could further demoralize investors, leading them to seek support from the European Central Bank (ECB). The ECB, on the other hand, is preparing to lower its deposit facility rate by 10 basis points to -0.50% in its September meeting. But there is room for further dovish speculation regarding the ECB’s plans to purchases assets. Hence, weak European data could easily revive the doves and weigh on the single currency. The EURUSD slipped below the critical 1.11-support following the Fed’s July cut. The 1.10 mark is the bears’ next natural target.

RBNZ to lower rates by 25 basis points

On Wednesday, the Reserve Bank of New Zealand (RBNZ) will give its policy verdict. The RBNZ is expected to lower its interest rates by 25 basis points to 1.25%, highlighting the rising economic risks and slowing global demand. The Kiwi erased 3.80% against the US dollar since mid-June and a dovish RBNZ statement could send the NZDUSD below the 0.65 level, which has acted as a solid support following the May rate cut.

China to post lower trade surplus, lower factory-gate prices

Eyes will turn to China on Thursday and Friday. China’s trade surplus is expected to have contracted to 37 billion US dollar in July from nearly 52 billion printed a month earlier. Exports may have fallen by 2.6% y-o-y (vs. -1.3% printed a month earlier) and imports may have slumped by 7.3%, slightly faster than last month’s -7% read as a result of a heated trade dispute between the US and China. On Friday, the Chinese consumer price data should confirm a steady 2.7% increase in July, while the factory-gate prices may have deflated by 0.1% over the same month. Weak Chinese data will likely revive global growth concerns, bringing the slowing global demand worries forward. Hence, the Fed doves could come back in charge of the market, demanding more rate cuts from the Fed to give support to the market. The Fed is expected to lower rates at least two more times within the next nine months, the next cut is priced in at 85% for the December meeting.

Does the US data really matter?

The US wholesale inventories may have decreased by 0.1% m-o-m in July versus +0.2% printed a month earlier, and the producer prices may have risen to 0.2% m-o-m over the same month from 0.1%. But the US data will likely remain secondary for Fed policy bets, the US-China trade tensions will remain the focus point.

Canada to release labour data as Loonie remains under pressure

Finally, on Friday, Canada will release its latest labour market data and any weakness could further weigh on the Canadian dollar. Loonie is already under the pressure of declining oil prices. The USDCAD could extend gains toward its 200-day moving average (1.3300) on the back of waning global demand expectations on rising US-China trade tensions.

Financial Markets and Political Commentary
 

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Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.