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Trade negotiations and renewed dollar strength is key this week

A deterioration in the relations between the US and China over trade, a renewed strengthening of the dollar and a shift in risk appetite. These are all factors shaping the moves across financial markets. Flash PMIs are eyed as a key data point. We look at the impact across forex, equities and commodities.

Dollar select

Assessing the trade disputes that the Trump administration engages itself with in shows that trade remains a key driver of risk appetite. Talks between the US and China are not over, but they have reached an impasse that seems fairly difficult to overcome for now. The US wants China to put into law the necessary changes protect against forced technology transfer, IP theft and currency manipulation. China is unwilling to do this and so deadlock has been reached. This is likely to continue until the two leaders meet at the G20, at which point hopefully a thawing of relations could be seen again. Mutual damage of a protracted trade war is not good for the global economy. However, also look at the impact of recent developments on USD/CNY there is already a key impact being seen. It is interesting to see that whilst the yuan has weakened by around 10% since April 2018 (when the US first put on the 10% tariffs). Since the dispute escalated again and the US increased the tariffs to 25% the  yuan has weakened by 2.5%. A move above 7.00 on USD/CNY would be a key signal to the market for further weakness. There is a positive correlation between a weakening yuan and deterioration in Asian PMIs. This suggests that yuan weakness is negative for growth in emerging Asia (US dollar strength drives a capital flight and fears over repayment of dollar denominated debt). Subsequently if there is an increasingly belligerent positioning on this trade dispute it will be risk negative and the potential for a global pick up in the second half would be in jeopardy.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.