Safe-havens gain as China warns over trade war retaliation

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29 May 2019


The safe-haven currencies strengthened again on Wednesday morning amid escalating concerns over the US-China trade war.

edia reports out of China suggested that Asia’s largest economy was ready to use its position as the world’s most forefront producer of rare earths as leverage in the trade conflict. The strongly worded comments mark another sign of retaliation from China that earlier this month slapped tariffs on $60 billion worth of US imported goods in response to a similar move from President Trump. EUR/USD has reacted off the back of the news by falling back towards the 1.115 mark, its weakest position since Thursday of last week, while the Japanese Yen continues to surge higher against its peers.

Macroeconomic data out of Germany so far this week has also far from helped the Euro’s cause, providing yet another reason for investors to steer clear of the Euro. Consumer confidence has declined again in Germany according to a Gfk survey released yesterday, with the index slipping back to 10.1 versus the 10.4 consensus. This morning’s jobs data also pointed to a deterioration in the country’s labour market, with the unemployment rate ticking upwards to 5% in May. These are both concerning developments that suggest that the recent slowdown in Germany could prove slightly more prolonged than first anticipated.

Pound pressured lower as eyes turn to May replacement

Sterling continued to be pressured lower this morning as investors turned their attention to who would replace Theresa May as Prime Minister and Tory leader following her resignation last week.

Former London mayor Boris Johnson continues to remain the bookmakers favourite, despite a host of other MPs throwing their name into the hat in the past few days. This has unnerved some investors given his pro-Brexit stance and his recent comments that suggest he is not as overly concerned regarding a ‘no deal’ as many of his fellow Tory leadership candidates.

We think there is a risk that Johnson’s appointment could drive Sterling even lower if the market perceives his leadership as increasing the possibility that the UK leaves the bloc at the end of October without a deal in place.

A good gauge of market concern is the spread between three month and six month implied volatility in the Pound, which is now at its highest level in three years. This suggests that investors are bracing for more violent swings in the UK currency in the coming weeks.