Trump to slap Mexico with 5% tariff. China readies plan to restrict rare earths.

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD is galloping higher this morning after President Trump announced a new 5% tariff on all goods coming into the US from Mexico.  According to the President’s tweets and a communication from the White House, the tariff is in response to Mexico’s failure to curb illegal immigration through its border with the US.  The 5% is set to kick in on June 10, and would scale to as high as 25% by October should Mexico fail to act.  More here.  As one might expect, risk assets are getting crushed this morning.  The Mexican peso is plunging 3%, the S&Ps are down 1%, oil prices have lost 2% and traders are flocking to gold, the yen, and global bonds (US 10s are now yielding below 2.20% and German bunds are trading at a new record low yield of -0.20%).  We’re seeing broad demand for USD this morning, but these gains have been somewhat tempered by a $10 rise in gold prices, which is helping EURUSD.  Canada just reported some mixed GDP data: +0.5% growth for March vs estimates of +0.3%, but just +0.4% for Q1 2019 vs expectations of +0.7%.  We think USDCAD risks reversing lower here as the funds, who are still net long the market, grow tired of a market that is not showing them the gains they were expecting, considering all the risk off waves that have hit oil prices of late.  We think the 1.3510s is pivotal for price action right now.  Next week’s calendar will be a busy one, featuring the US ISM survey for May on Monday, followed by a speech from Fed chairman Powell on Tuesday and the US Services ISM on Wednesday.  Thursday will bring the April trade balance data for the US and Canada, and Friday will showcase the May job reports for both countries.

USDCAD DAILY

USDCAD HOURLY

JUL CRUDE OIL DAILY

EURUSD

Euro/dollar is bouncing this morning traders follow gold prices higher into this latest wave of risk-off for global markets.  Trend-line chart support in the 1.1120 held this morning and trend-line resistance in the 1.1160s appears to be the next stop should August gold futures continue to march higher here.  Dollar/yuan spiked higher in the 6am hour after ex-PBOC governor Zhou said the 7.00 level is not necessarily a threshold for Chinese authorities (with regard to exchange rate management).  Germany reported weaker than expected Retail Sales this morning (-2.0% MoM for April vs +0.1%) and softer than expected CPI figures (+1.4% YoY for May vs +1.6%), but traders seem to be ignoring this.  They’re also ignoring the fact that German bunds are now yielding -0.20%, which is the lowest on record.  It’s all about gold prices, for now at least.  Next week’s calendar should put European data back in focus, as we’ll get the Markit Manufacturing PMIs out on Monday, the Services PMIs out on Wednesday, German Factory Orders and Industrial Production, and then of course we’ll have the ECB meeting on Thursday.

EURUSD DAILY

EURUSD HOURLY

AUG GOLD DAILY

GBPUSD

Sterling is crumbling yet again today as traders simply find it easier to sell amidst continued Brexit/UK political uncertainty and global risk-off sentiment.  An attempt was made to regain the 1.2620s (yesterday’s support turned resistance) in early European trade but the sellers rushed back in when this failed.  GBPUSD is now scrambling for support in the mid-1.25s and the EURGBP cross has broken above chart resistance in the 0.8860s.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar continues to hold up remarkably well despite all the risk-off selling that is hitting global stocks and copper prices today.  We think this is part in parcel due to the rally in gold prices and EURUSD’s inability to make news lows here.  We also think the fact that USDCNH hasn’t yet taken out the 6.9500 level to the upside is somewhat supportive as well.  We think AUDUSD will continue to chop around in the 0.6905 to 0.6925-35 area until the Reserve Bank of Australia announces its latest decision on interest rates next week (Monday night ET).  There is overwhelming market consensus at this point that the RBA will cut rates by 25bp.

AUDUSD DAILY

AUDUSD HOURLY

JUL COPPER DAILY

USDJPY

Dollar/yen is collapsing lower today as risk aversion rears its ugly head again following Trump’s provocation against Mexico.  Bloomberg is also reporting that China has readied a plan to restrict exports of rare earths to the US if the trade war deepens.  More here.  We think today’s move below chart support in the 109.20s is technically negative, and should keep the sellers in charge near term.  It will be interesting to see later this afternoon if the funds (who remain net long USDJPY as of May 21) continue to purge long positions as the market moves against them.    

USDJPY DAILY

USDJPY HOURLY

JUN S&P 500 DAILY

Charts: TWS Workspace

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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