Will we see a new trade war between US and Mexico?

US Session Forex Brief, May 31 – Risk Aversion Still the Name of the Game Today as Trump Threatens with Tariffs on Mexico

Posted Friday, May 31, 2019 by
Skerdian Meta • 3 min read

The sentiment in financial markets shifted to negative at the end of last month as the trade war escalated once again after Donald Trump increased tariffs on China. Since then, risk aversion has been the name of the game in financial markets and we are seeing a similar price action almost everyday. Safe havens have been going up while risk assets keep declining and that’s what’s been happening today.

In fact, the trade tensions are increasing instead of cooling off and that is hurting stock markets even more. China is stepping up its game as we heard today that they will take retaliatory measures against US on Huawei and they are also setting up a list of unreliable entities to combat foreign firms that cut supplies to China. Earlier on, Donald Trump, or as he calls himself now – the “Tariff Man”, tweeted that he will introduce a 5% tariff on Mexico which might go up to 25% if Mexico fails to stop immigration going into the south border of the US. That hurt the sentiment even further, sending Gold higher and the Mexican Peso crushing down.

European Session

  • German Retail Sales – Retail sales have turned positive this year in Germany apart from March when we saw a 0.2% decline which was revised higher today to 0.0%. Today’s report was expected to show another increase of 0.4% in retail sales but we saw a sudden decline of 2.0%.
  • German Prelim CPI – Consumer price index inflation kept weakening last year in Germany as in the rest of the globe and in January we saw a 0.8% decline. But it turned positive again growing by 0.5% in February, 0.4% in March and 1.0% last month. Inflation was expected to cool off today to 0.3% for this month but it missed expectations coming at 0.2%.
  • Trump Threatens Mexico With Tariffs Donald Trump tweeted this morning, threatening with 5% tariffs on Mexico which might go up to 25% if Mexico doesn’t stop immigration from Mexico itself and from the rest of Latin America into the US. As a result, the Mexican Peso has turned pretty bearish.
  • Comments from China According to the Chinese state radio, China is to set up ‘unreliable entities’ list to combat foreign firms that cut supplies to China. They are planning to draft list of ‘unreliable entities’ targeting foreign parties that are causing harm to Chinese firms’ interests and will disclose details of the list in the near future.

US Session

  • Canadian GDP The GDP report was released a while ago; the economy was expected to grow at 0.4% that month but beat expectations, growing by 0.5%. Canada Q1 2019 GDP rose by 0.4% on an annualized basis 0.7% estimated. YoY GDP for March comes at 1.4% versus 1.2% estimated. Growth was driven by 0.9% increase in household spending which is the fastest since 2017. Business investment in machinery and equipment rose by 8.7%, exports declined by -1.0% while imports increased by 1.9%. Net trade was the biggest drag on growth. The final domestic demand rose by 3.4% versus -1.0% the previous quarter.
  • US Core Price Index – The core price index has been growing by 0.1% all this year, apart from February when it moved up to 0.2%. In March, the price index fell flat to 0.0% but was revised higher today to 0.1%, while today’s report showed a 0.2% increase for April.
  • US Personal Spending and Income – Last month’s report showed a big jump in personal spending of 0.9% which was revised even higher today to 1.1%. In April, personal spending was expected to increase by 0.2% but it beat expectations increasing by 0.3%. Personal income also beat expectations of of 0.3% and instead it increased by 0.5% last month.

Bearish EUR/JPY

  1. The main trend remains bearish
  2. The MAs are pushing the price down
  3. Fundamentals good for the JPY

Moving averages keeps pushing the price down

EUR/JPY has been on a bearish trend since the middle of April as the H4 chart above shows. So, the way to trade this pair is to wait for retraces higher and then sell it. The 50 SMA (yellow) and the 100 SMA (green) have been providing strong resistance and they have pushed this pair lower as the sentiment in financial markets turns increasingly negative. I am waiting now on another pullback higher and when we reach one of the moving averages I will look to sell EUR/JPY.

In Conclusion

The US personal spending and personal income posted some nice numbers a while ago but the USD turned bearish suddenly. Perhaps it is because of the comments about the new front in this global trade war that the US is trying to open with Mexico. Risk assets turned bullish for a moment but they are back to bearish now.

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