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Trade war escalates AGAIN

Published August 26, 2019

Author: Rhys Miles

Not that the dialogue around the US China trade war was remotely improving but it has now gotten seriously worse.

On Friday, China hit the US with additional tariffs on US$75B worth of US goods. Almost immediately, President Trump ordered US companies to start looking for an alternative to China and promised a more painful response, ultimately raising tariffs on US$250B worth of Chinese goods to 30% from 25% as of October 1. He also said a new round of tariffs on US$300B in goods will be taxed at 15%, up from 10% from the 1st of September. The USD dollar was hit hard by the escalation of trade tensions with USD/JPY and USD/CHF falling nearly 1%, though the AUD/USD did not benefit from the falling greenback as investors and central banks grow more concerned about a recession.

Federal Reserve Chairman Jerome Powell’s Jackson Hole speech was a little disappointing. He refrained from mentioning the possibility of easing next month (or the near future) and simply said they are watching carefully to see how the US is impacted by events since July. But the market didn’t care – they were satisfied to hear Powell admit that the economy faces “significant risks” and the central bank “will act as appropriate to sustain the expansion.” Around the same time, China announced said tariffs on the US and nothing else mattered!

Powell also stated that the US economy was “in a favourable place” with other Fed officials also stating that “they shouldn’t act right now and should stay the course” and “the US shouldn’t ease simply because other countries are weak”. All of these seemed designed to continue to talk up the US economy but the fact remains the US China issue may very well force their hand.

Trade wars aside, other data of note this week whilst less impactful will be Germany’s Q2 GDP on Tuesday, US Consumer confidence Wednesday and US Q2 GDP on Friday.

The AUD/USD is now below the lower end of the recent range around 0.6690 with big drops also against the EUR and GBP.