· The Mexican peso sank to three-month lows against the dollar on Friday after Washington unexpectedly said it will slap tariffs on all goods coming from its southern neighbor.
The safe-haven yen advanced as the Trump administration’s move to escalate its trade war with other countries shook already fragile investor sentiment in global financial markets.
The Mexican peso was down 1.8% at 19.4812 per dollar after President Donald Trump said on Thursday the United States will impose a 5% tariff on all goods coming from Mexico from June 10 until illegal immigration is stopped.
At one point, the peso weakened to 19.5950 per dollar, its lowest since March 8.
· “Imposing these tariffs is in principle, not allowed under the free trade agreement currently in place between Mexico and the United States or under WTO general frameworks,” wrote Tania Escobedo, strategist at RBC Capital Markets.
“It is likely, however, that Trump will claim the measure is a matter of national security, referring to the International Emergency Economic Powers Act (IEEPA).”
· The yen was up 0.35% at 109.240 per dollar and also made gains against the euro and Australian dollar.
· The dollar index against a basket of six major currencies was flat at 98.106 after inching down the previous day, when it snapped two straight sessions of gains amid a continuing decline in U.S. yields.
The index was still headed for a 0.5% gain this week, supported by weakness in peers such as the euro and sterling, and the U.S. currency’s own status as a safe-haven in times of market and economic troubles.
“The dollar’s recent gains are part of the flight-to-quality into the United States, notably the strong investor demand for Treasuries which has driven their yields lower,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.
The 10-year U.S. Treasury note yield has declined steadily this week and touched 2.171% on Friday, its lowest since September 2017.
· The euro was steady at $1.1133. The single currency was down 0.62% this week, weighed by factors including concerns over Italy’s rising debt and the prospect of Trump opening up a European front in his trade war.
· The bid tone around the Japanese Yen strengthened after China said it is ready with a plan to limit rare earth exports to the US if needed. USD/JPY, therefore, stalled its recovery attempts and refreshed two-week lows at 109.14 amid the intensifying global trade war.
Earlier today, a renewed risk-aversion gripped the Asian markets on the reports that the US President Trump imposed new tariffs on Mexico.
The USD/JPY pair has spent most of the day trying to extend gains above a critical Fibonacci level at around 109.65, with bulls finally giving up at the end of the day. In the 4 hours chart, the pair was unable to advance beyond a mild bearish 100 SMA, but held above a directionless 20 SMA, while technical indicators turned south within positive levels, now nearing their midlines. The pair could recover further on renewed buying interest above the 109.90 level, with scope then to advance up to the 110.60 region.
Support levels: 109.40 109.00 108.65
Resistance levels: 109.90 110.20 110.60
· Investors have been keeping a close watch on the Chinese yuan, seen as a key indicator amid the intensifying U.S.-China trade war — and much concern has been centered on whether it will breach the 7 yuan per dollar key level.
· China’s threat to curb exports of rare earth minerals to the United States could move the needle in an escalating trade war as the world’s two largest economies continue to jockey for leverage.
The official newspaper of the Communist Party of China explicitly warned the U.S. on Wednesday that China would cut off rare earth minerals as a countermeasure in the escalated trade battle.
About 35% of rare earth global reserves are in China, the most in the world, and the country is a mining machine, producing 120,000 metric tons or 70% of total rare earths in 2018, according to the United States Geological Survey. The U.S. pales in comparison as it mined 15,000 metric tons of rare earths in 2018 and has a total of 1.4 million metric tons of reserves, versus China’s 44 million.
U.S. consumption of rare earth compounds and metals relies heavily on imports, which rose to $160 million in 2018, according to USGS. Eighty percent were from China. To make it worse, although other countries supply to the U.S. including Estonia (6%), France (3%) and Japan (3
· The U.S. Treasury market has diverged from the Federal Reserve in painting a bleak picture of future U.S. economic growth and inflation, but the central bank looks unlikely to bend to the market’s will anytime soon barring a notable turn for the worse.
Concerns about the impact of the U.S.-China trade war on global growth, tensions between Italy and the European Union, and the lack of agreement over how Britain will exit the European Union helped send benchmark U.S. Treasury yields to their lowest levels since September 2017 this week.
The yield curve between three-month bills and 10-year notes also moved further into negative territory. The inversion - when the yield on short-term maturities tops the yields on longer-dated ones - if it persists, is seen as a reliable indicator that a recession is likely in one-to-two years.
“If both rates and credit were pointing the same way they would be much more prone to have the market driving Fed action, but this discrepancy means I don’t think the Fed will get bullied into anything,” said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York.
With the drop in yields, interest rate futures traders increased their expectations of a rate cut to a better than 50-50 chance at the Fed’s September meeting, and they see more than an 80% chance of at least one cut by December, according to the CME Group’s FedWatch Tool.
· The Trump administration's threat to impose tariffs on Mexico will have less of a global spillover than the US-China dispute. But it's still negative for risk sentiment
This in turn keeps the threat of auto tariffs on eurozone car exports very much alive.
· “We are now entering into a period of great power rivalry. The outcome is unclear, but it is critical that we stabilize the system.”
That was the warning on Thursday from Singapore’s Heng Swee Keat, the man set to be the city-state’s next prime minister. China’s rapid ascent over the past decade, he said, has caused a clear shift in global politics, and those changes need to be addressed.
“U.S.-China trade tension is a source of concern for everybody in the region,” Yoichi Suzuki, an adjunct fellow at the Japan Institute of International Affairs and former chief negotiator for the country’s free trade agreement with the European Union, said Friday.
“It is not only affecting these two countries but it’s affecting everybody,” he told CNBC’s “Squawk Box.” As you see, the stock market is going down, the economy is slowing. So we need to see a solution as soon as possible.”
· U.S. President Donald Trump said Thursday that an additional tariff on Mexican goods would address what he claimed was a “border crisis” that resulted in America being “invaded by hundreds of thousands of people.”
Experts said Trump’s threat puts the fate of the United States-Mexico-Canada Agreement, or USMCA, in question.
Juan Carlos Hartasanchez, senior director at advisory firm Albright Stonebridge Group, said it seemed unlikely that the new version of NAFTA will be ratified this year.
· Shanghai wine importer Alex Chen has spent the last 10 days moving all his American wines - from chardonnays to zinfandels - out of warehouses in the city’s free trade zone before they are hit with an extra tariff that kicks in on Saturday.
On both sides of the Pacific, importers and exporters are scrambling as further tariffs of 15% come into effect, on top of the 10% duties imposed last September. The new tariffs will force them to raise prices, take a further hit on margins, or, if they can, find alternatives.
China’s added tariffs on American wines would leave no margin for importers like his firm, Alexander Wine Co., he said.
· U.S. Secretary of State Mike Pompeo began a five-day European trip on Friday with a delayed visit to Berlin, where he was expected to press Germany to boost its military spending, avoid dealings with China’s Huawei Technologies Co Ltd and reconsider a pipeline project with Russia.
· Russian President Vladimir Putin and Japanese Prime Minister Shinzo Abe will hold a summit meeting on June 29, when Putin visits Japan for a meeting of leaders of the Group of 20 nations, Russian Foreign Minister Sergei Lavrov said on Friday.
Senior officials and political leaders from both countries have held talks frequently in recent months to discuss ways to put an end to an decades-old territorial dispute and conclude a peace treaty.
“With eyes on the Russia-Japan summit meeting at the time of the G20 summit in Osaka, we made checks on the state of progress in Russia-Japan relations,” Lavrov told reporters after meeting his Japanese counterpart, Taro Kono.
· Thailand’s annual headline inflation rate in May likely slowed from the previous month, but stayed inside the central bank’s target range for a third straight month, a Reuters poll showed.
The median forecast of 11 economists was for the headline consumer price index (CPI) to rise 1.0% in May from a year earlier after April’s 1.23% increase.
The Bank of Thailand (BOT) has forecast 2019 headline inflation of 1.0%, against its 1% to 4% target range.
According to the poll, the core inflation rate, which strips out energy and fresh food prices, was seen at 0.60% in May, barely changed from April’s 0.61%.
Thai central bank has left its policy interest rate unchanged at 1.75% since tightening in December for the first time since 2011.
It will next review policy on June 26. Most economists expect no policy change throughout 2019 as inflation is benign and growth slows.
· Oil prices fell by more than 1% on Friday and were on track for their biggest monthly fall since November as trade conflicts spread and U.S. crude output returned to record levels.
Front-month Brent crude futures, the international benchmark for oil prices, were at $65.97 at 0639 GMT, down by 90 cents, or 1.4%, from last session’s close.
U.S. West Texas Intermediate (WTI) crude futures were at $55.92 per barrel, down 67 cents, or 1.2%, from their last settlement. WTI earlier marked its lowest since March 8 at $55.66 a barrel.
The drops mean that crude oil futures are on track for their biggest monthly loss since last November.
U.S. President Donald Trump ramped up trade tensions globally by vowing to slap tariffs on all goods from Mexico, firing up fears over economic growth and appetite for oil.
The Mexico trade dispute adds to a trade war between the United States and China, which many analysts expect to trigger a recession.
“All is not well with the economic world, at least according to bond and commodity traders,” Michael McCarthy, chief market strategist at futures brokerage CMC Markets in Australia, wrote in a note published on Friday.
“These (price) moves signal deteriorating sentiment about the outlook for global growth,” he said.
Reference: Reuters, CNBC, ING, FX Street
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