After the bullish start of the year, the rand has started to weaken since the last Thursday. Let’s point out the main factors affecting the ZAR and set the key levels for this week’s trading.
Trade wars: to be continued
Why is the euro declining and how long will the US dollar rise?
Trade wars appeared to be one of the most discussed topics since the US president Mr. Trump imposed tariffs on steel and aluminum in March 2018. The US and China remain the main players in the trade wars arena. Market talks slightly slowed down, however, worries still exist.
Although Donald Trump announced that trade wars are good and easy to win, it is well-known that trade wars will affect the global economy and the American as well. As a result, on May 4, the US and China ended their 2-day negotiations. Representatives of countries met to soften trade tensions.
If you read newspapers, you will see that most of them talk about a positive tone of the negotiations. However, the only one positive point is that countries agreed on the further dialog. But if we talk about the main points of an intercountry dispute, progress was not achieved. It seems that countries met not to negotiate but to raise their demands. The US representatives insisted on the cut of China’s trade surplus with the US by $200 billion to 2020. Moreover, the US want China to cut off support for advanced manufacturing industries in its “Made In China 2025” program. But that is not all, China has to reduce tariffs to 3.5% from the current average level of 10%; prevent cyber-spying into commercial networks in America; accept US restrictions on Chinese investments in sensitive technologies; and afford an access of its services and agricultural sectors to American competition.
China is not going to give in for free. According to Chinese authorities, the country is not afraid of trade wars and will retaliate if it is needed.
So as we can see, the only one really worth point that was achieved by parties is an agreement on the further talks. However, the US threat of tariffs on $150 billion of Chinese imports is still in play.
It is clear that trade wars affect not only the US and China but other countries as well. Let’s have a look at the EU.
The European Union is highly concerned about the rise in trade protectionism as the European Central Bank aims at the tapering of the stimulus programs. Negative economic data will lead to the slowdown of the tapering. Based on the statistics, the European economy has weakened a lot during the last months. Up to date, German factory orders dipped for a third month in March; the Sentix investor confidence index fell to the lowest level since February 2017; the IHS Markit retail purchasing managers index declined to a 17-month low. ECB President Mr. Draghi noticed that although the influence of the already-adopted tariffs is limited, the prospect of a trade war between the US and China could hurt confidence and reduce consumption and investment. As a result, the ECB members had to hold off from discussions on the tapering of the stimulus measures last time they met. A continuation of the trade wars tensions will cause further fall of the European economy and will lead to a further depreciation of the euro that has already reached the lowest level since the end of 2017.
Moreover, representatives of the European central bank talk about the harmful effect of the trade wars on the world economy. According to a UniCredit research, the decline of confidence has already reflected on the global growth. In April, the bank’s global leading indicator dipped to its lowest level in two years.
To conclude, we can say that although two biggest world economies try to negotiate, there is no significant progress in the trade wars deal yet. The US dollar gained momentum and is rising now. However, there are risks for the further rally if the trade conflict escalates. Moreover, trade wars will affect not only China and the US but the rest of the world as well. One of the examples is the European Union that is under big pressure now as the economic data has already weakened. Other countries will suffer from the tariffs and quotes as well because world economies are interconnected. So until China and the US come to an agreement, the world economy will suffer.
If we look at the daily charts of the US dollar index and the USD/JPY pair, we will see a misleading trend.
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