We have a veritable whirlwind of crosscurrents at the moment on virtually all fronts. The trade war theme dominates for now, with this Friday seeing a large round of Chinese tariffs on $34 billion in US goods actually going into effect. The temperature with China is also rising with every uptick in USDCNY, which has seen its largest two-week surge higher since the 2015 devaluation move. At what level does the weaker CNY merit a Trump response and/or begin to destabilise global markets? The 6.70 area is the last notable technical resistance ahead of the 7.00 level. Elsewhere, Trump blasted the EU over the weekend for being “possibly as bad as China, just smaller”. And the EU has readied its own retaliatory tariffs.
Over in Germany, the chaos in the ruling CDU/CSU coalition continues to drive uncertainty domestically even as EU leaders managed a degree of solidarity at last week’s summit in agreeing on a framework for dealing with migrants on an EU-wide basis. The CSU head and interior minister Seehofer said that he offered to resign at a meeting over the weekend, but then decided to take back that offer as the two parties try to hash out a way forward. Chancellor Angela Merkel has more leverage after agreeing that deal last week, but the future of the CSU/CDU coalition still hangs in the balance.
Meanwhile in Italy, Lega’s leader Salivini has seized the initiative on every front and has declared the intention to support a coalition of EU-sceptic parties across the EU ahead of the May 2019 EU parliament elections. Next year, 2019, is shaping up as an important year for the EU’s fate. Italian yields, meanwhile, have calmed considerably in the wake of last week’s EU summit and the deal on migrants, with the 2-year BTP back down to 75 basis points from over 100 basis points mid-last week.
As well this week, we have a busy economic calendar, starting with the Reserve Bank of Australia tonight in Asia (see AUD comments below) and the Riksbank tomorrow in Europe. But if we can tear our eyes away from the USDCNY chart and Trump headlines, it’s the heavy US data calendar all week that deserves the most attention after we found out that core US PCE inflation in May hit 2.0% for the first time since early 2012. The Federal Open Market Committee minutes are set for release on Thursday due to the Wednesday Independence Day holiday.
In Mexico, Obrador’s strong victory over the weekend is an important test for emerging markets as MXN is one of the most liquid EM currencies and a proxy for EM. The peso has done very well relative to EM peers in recent weeks as the market has backed away from its worst fears on what an Obrador “left populist” presidency may entail. Importantly, Obrador’s party may also gain both houses of the Mexican Congress, possibly setting up the most powerful government since the mid-1990s in terms of power to implement policy – but the final results will not be clear for days.
All eyes on the USDCNY this week, where the 6.70 level is the last local resistance area ahead of the cycle top at 7.00.