Today’s Key Market Drivers: 7th May 2019

Trump spooks markets with tariff threats.


Donald Trump’s Sunday Tweet sent financial markets into a spin when they opened on Monday after he said “For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billion Dollars…” Trump commented that trade talks were not progressing as quickly as he would have liked and hinted the Chinese have continued to try and renegotiate deals agreed too, stalling any final agreement and generally frustrating the process.

Financial markets gapped sharply lower at the market open with the AUD v USD gapping down half a cent and money flooding into the safe havens. Stock markets throughout Asia fell sharply with the Chinese stock market closing over 5% lower.

China was due to send a large trade delegation to Washington this week to resume trade talks and rumours were running rampant those talks may be cancelled in the wake of Trump’s threatening Tweet. China announced on Monday it would still attend the trade talks in the US capital and this eased market concerns with US stock markets recovering much of their initial losses by the close of trade. The S&P 500 only closed down 0.5% after being more than 1% lower in the pre-market.

The Aussie Dollar, whilst off its lows, remains extremely weak leading into the Reserve Bank of Australia’s monetary policy statement today.

I expect the RBA to drop the official cash rate today.


There is no reason for the RBA to hold off and not drop the official cash rate today. It said recently that unless inflation and the jobs market picked up the next move would likely be lower with rates. Inflation and wages have not picked up, the jobs market remains flat and the economy is in desperate need of not just one rate cut but two if not three. One rate cut won’t move consumers to take on risk and one rate cut won’t significantly help mortgage holders who are struggling under the weight of monthly mortgage repayments. The RBA will need to cut at least twice and that is why I believe the AUD v USD is destined for much lower levels in coming quarters.

Currency values trade-off interest rate differentials and if the US Fed keeps its official rate at 2.5% and the RBA drops its official cash rate to 1.25% and then 1% there is no reason for investors to hold Aussie Dollars when they can get a much better return in US Dollars. The RBA rate decision is 2.30pm AEST today and you should expect increased volatility on the local currency leading up to and throughout the afternoon today.

I expect the RBA to drop the official cash rate today.


The US economy is continuing to surge forward with 263,000 jobs created in the US in the month of April. The number smashed economists estimates but interestingly failed to rally the US Dollar on Friday. I find it perplexing that 50% of professional traders surveyed were still pricing in the potential for a US Fed rate cut before the end of the year. Those traders have currently got it squarely wrong in my view. Based on the current US economic data there is no way the US Fed is going to cut rates even if inflation stays where it is. If the economy continues on the current path inflation will eventually pick up and therefore in my view, the next move from the Fed will be up and not down.

Euro Zone economic data continues to impress.


Recent Euro-Zone economic data has beaten market estimates and Monday’s Euro-Zone Retail Sales figures also helped boost the economic outlook for the world’s largest economic region. Retail Sales for April came in at 1.9% vs the 1.6% the market expected.

German Factory Orders and Construction PMI is due today and if the data continues to impress the Euro will continue to rally against most of its rivals.

RBNZ to release its May statement tomorrow.


The market is expecting the RBNZ to cut its official cash rate tomorrow and I suspect if the RBA cuts today the expectation will only grow larger the RBNZ will also cut. The Governor of the RBNZ said two months ago the next likely move will be down and with inflation recently slowing just like the RBA there is no reason for the RBNZ to hold off any longer. Waiting another month won’t make things any better and traders are expecting a cut of 0.25% from RBNZ when they release their statement at midday AEST tomorrow.

I would expect the AUD and NZD to initially decline by around half a cent if both Central Banks cut rates.

Now is a great time to be out of the currency market.


CWhen volatility picks up like it has in the last 24 hours it is a great time to be out of the currency market. Sudden moves lower and higher is exactly what the market-making brokers want as it sucks in the amateur retail traders who try and chase price for profit. If you got sucked into the market yesterday the probability is you lost money and it’s a great lesson to be learned. Punters trade high volatility news-driven events. Professional traders will simply sit and wait and enter the market when there is a consistent movement of money that is not being driven by a high level of fear and greed.


Increased risk comes from when you don’t know what you are doing.

AB

 

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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