Dear gentlemen, we have an extremely volatile and busy week ahead of us! You will not remember when there were such important news and events for currencies and economies. We are talking about the upcoming meeting of the European Central Bank, and the next day a report on the USA labor market. But everything in order.
The USA president Donald Trump continues to escalate the situation in the trading world by introducing the new trade tariffs against Mexico. It seems that Trump liked to fight with China, and it was decided to use the same tool. Since we know the reason the fight with China and it is clear and mutual (it is a trade surplus), with Mexico – the problem with illegal migrants. Of course, Mexico will suffer more from the trade barriers than China, whose economy is much stronger. But markets reacted violently for other reasons. The problem is American companies. For example, General Motors, only according to the first estimates will lose on the order of hundreds of millions of dollars for every 5% duty against Mexico. If the southern neighbor of the USA decides to answer, first of all, it will be an agricultural sector which suffered from the trade war with China. Mexico is one of the world's largest buyers of American corn. Well, there will be a day, there will be food. We'll know soon enough.
So, back to Europe. Unemployment in Germany rose in April for the first time in four years. It is a very alarming signal. On this week, before the most important day for the single European currency, releases of business activity in the manufacturing sector will be held today. Tomorrow, the EU will talk about basic and consumer inflation, as well as the unemployment rate. Taking into the account the rise in unemployment in Germany, as we learned last week, this indicator may surprise the markets. On Wednesday, the world will learn about business activity in the EU services sector and retail sales. In particular, retail sales may also surprise negatively, taking into account their decline in Germany, as evidenced by last week's releases. And now, the most important and volatile day for the single European currency is Thursday. Yes, the release of GDP is always important and volatile, but it is not the "news" of the day. The ECB meeting on monetary policy is extremely important. Earlier, the head of the European regulator Mario Draghi announced the introduction of TLTRO at the June meeting. And there are two medals. It all depends on what the ECB focuses on. Either this will not be deposited with a negative interest rate, as it is now, or it will be more attractive loans for business, with a negative rate. Long-term loan program of the EU financial sector is quite extensive, in which nuances play a role. About it, we will know on Thursday.
The USA dollar will be sensitive to changes in the trade war. and comments will be, there is no doubt. There will be comments, there is no doubt about it. During the whole week, there will be data on business activity in the manufacturing sector, and employment in the same sector. It is production data that is important in any period of a trade war, as this sector suffers the most. On Wednesday, data on business activity in the service sector and the non-manufacturing sector will be released. The Fed's Beige book will also be published with detailed comments and forecasts of the USA regulator. The end of the week, as usual, the first Friday of the month is the release of the USA labor market report. There was a period when markets paid more attention to wage growth, as the wages that push inflation in the long term. Then I was surprised by unemployment, which is kept at record low levels. Now, attention is returning to employment and expectations of changes in employment outside the agricultural sector. The 180-190 thousand is quite good, even enough for a strong and growing economy. But if this indicator is an unpleasant surprise, then under the USA dollar the soil will weaken. We have an extremely volatile and interesting week ahead of us!
The Australian dollar has been trading in a very narrow range for the last few weeks, only 45-50 points. The instrument is waiting for an incentive for further movement, and this week, Australia will provide it to the market. In the night from today to tomorrow will be a meeting of the Reserve Bank of Australia.
And if this decline in the interest rate (the probability of more than 90% that the rate will be declined by 0.25%) will be given to the Bank easily. The key driver will be the rhetoric of the RBA. Can we expect a new round of decline in the coming months?
The escalation of the trade conflict leaves Australia no chance. At a time of rising chances of the next recession, the Central Bank needs to give more incentives to the economy. It is worth noting that the Australian economy is not so bad, in particular, the labor market is strong enough. Also in the week will be released on retail sales in Australia, GDP, and business activity indices, as well as data on the trade balance of the country. Drivers for the breakthrough of a narrow trade corridor are more than enough.
A new round of trade wars ( between the USA and Mexico) leveled all the efforts of OPEC member countries to reduce production, as well as sanctions against Venezuela and Iran. The last factors pushed the quotes since the beginning of the year, and the USA trade negotiations with China, as participants, assured going well. Today, the fears of a global economic recession are growing again. China is going to respond to a new trade barrier from the States, and the Administration of the USA president will not be long in coming, which will lead to an even more sharp escalation of the trade war. An extremely serious question that has become a "bone in the throat" of many world investors is "Will China begin to manipulate its own, one of the largest packages of purchased American debt in the world?". China owns the USA securities (Treasury and state debt bonds) by almost $1.2 trillion. This is just over 5% of the total USA debt market.
It has already been noted that China has stopped buying the USA public debt and is gradually selling it. Moreover, Chinese scientists estimate the possibility of a full sale of the USA bonds, which will shake the American economy. So, in the current conditions of aggravation in the American-Chinese trade war are inevitable. This, at least, in this situation. If Mexico is already going to Washington to solve the current problems, namely migration, which is why Trump has introduced trade tariffs against its southern neighbor, then China is not going to give up. Further escalation will only exacerbate the prospects of the world economy, and, as a consequence, the demand for fuel, and eventually for raw materials.