WEEK 3

WHAT MOVED THE MARKET

US – Mexico Trade Deal

Why is the US – Mexico Trade Deal so important?

Trump has reached a deal with Mexico and agreed to abolish the 5% tariffs on all Mexico goods coming into the US. This agreement is a significant milestone and has prevented the US-Mexico- Canada agreement from deteriorating further. Currently, USA is Mexico’s largest trading partner and involves over $200bn in goods and services.

What happened last week?

Upon agreement of the trade deal USD/MXN experienced a significant appreciation (Figure 1.) Since the announcement, the Mexican Peso has consolidated most of those gains.

Figure 1

US Treasury Bonds

Why are the US Treasury Bonds so important?

The 2 year US Treasury Yields fell to 1.834% to its 1.5 year low due weaker employment numbers and the expectations of a rate cut by the US Federal Reserve. (Figure 2). Both the 2 year and 10 year Treasury Notes are important indicators of the economy’s health and interest rate.

How did it affect the markets?

Since late December, the 10 year Treasury Yields have fallen from 2.74% to 2.32% while the S&P 500 has returned 20.2%. As yields fall, US investors look to achieve a better return on Investment in other asset classes such as stocks. Furthermore, safe haven assets such as Gold and Japanese Yen have seen a dramatic appreciation as investors start to adopt a more conservative approach.

Figure 2

TECHNICAL ANALYSIS

AUD/USD

Figure 1: AUD/USD Daily Chart

AUDUSD has remained depressed over the entire week, Friday marks the fourth red candle this week. Last Friday (7th June), AUDUSD reached a one-month high price of 0.70270 post Non-Farm Payroll (NFP) but struggled to extend the momentum further beyond the 0.70270 resistance level.  MACD illustrates that there is barely any bullish momentum and the MACD line (blue) is about to cross below the Signal line (orange), which signals a bearish crossover.

There exist growing concerns over further escalations in the US-CHINA trade tensions in the market as well as increasing expectations for further RBA rate cuts in the coming months. These factors have put AUDUSD under selling pressure. Furthermore, the recent USD rebound (despite stronger market expectations that the FED will cut rates by the end of this year) weighed the pair down further. On a side note, the recent Chinese macro data releases have little effects on the pair. At the moment, AUDUSD has been fluctuating between the 0.69750-0.70270 resistance and the 0.68615 support, ADX shows no significant trends.  0.68615 is a major support level, AUDUSD is definitely approaching that price level, and will retest it in the next week. If the support level is decisively broken, downside region will be opened up. Otherwise, the pair is likely to follow the path indicated in green: bouncing back up from the support and retest resistance.

XAU/USD

Figure 2: XAU/USD Daily Chart

Gold markets broke down at the open on Monday due to the aversion of tariffs between US and Mexico. However, it can be seen that the metal rallied on Thursday after some crude oil tankers were attacked, approaching the upside and reaching the gap that kicked off early this week. On Friday, a gravestone doji formed due to strong US retail statistics pushing Gold prices back down from 1358. 1350 is an important resistance, so it is expected that there is some selling pressure above there. If Gold price decisively break above 1350, its closest target will be 1365. Unless Gold price drops below the 1322 support level, it will mostly likely continue the uptrend after some small price corrections. MACD indicates that there is plenty of bullish momentum and ADX is well above 25, revealing that the uptrend is continuing.

The Gold Market is very sensitive to risk appetite and global situations. The trade war between US and the rest of the world has caused much tension. Investors should keep an eye out for progresses and announcements.

Key Economic Announcements for the week ahead