20.05.201912:38 Forex Analysis & Reviews: US-China trade negotiations halted: AUD and NZD will continue to decline

Trade negotiations between the United States and China are suspended after it became clear that the basis for a mutual search for compromises was not formed, and moreover, there is an escalation of tension. China was ready to continue negotiations but after the US imposed restrictions on Huawei, it became obvious that the period of escalation had not yet worked out to the end.

Google is preparing to end cooperation with Huawei and will close the Chinese company access to Google services, including the Google Play app store, the Chrome browser, the Gmail client, YouTube, and maps. Whether this threat will be fully realized is not yet clear, however, the principles of the United States in negotiating were fully manifested and do not leave the Chinese side to the choice.

China is ready to reduce GDP by 1% due to the escalation of a trade war but does not intend to make any changes to the plans for the structural development of China. Anyway, the trading partners of China, especially the countries of Asia, will feel the deterioration of external conditions, which can lead to a decrease in trade turnover, as well as a slowdown in investment inflows and as a result, there was a fall in the exchange rate of national currencies.

Major stock markets have responded with a decline , reacting to a new round of escalation and the trend remains negative.

AUD/USD pair

The latest NAB and Ai Group polls show that business conditions in Australia are declining. In April, the NAB index fell by 4p up to + 3n and despite the fact that the index formally remains in positive territory, its dynamics are clearly negative for the time being.

The dynamics of the labor market is also gradually changing direction. The employment index in the NAB survey fell in April to a record low since August 2015 by 7 points. The unemployment rate has resumed growth, participation in the labor force is still at high levels but in order to rely on wage growth, conditions look weak. This moment is reflected in the outpacing growth in the number of part-time workers. According to the ABS Wage Price Index in the first quarter, wage growth was at the level of 2.3%, which was unchanged from 4 square meters in 2018. The general inflation was only 1.3%. Overall, the dynamics are such that it is not necessary to rely on inflation.

These trends can not be ignored by the RBA. Despite the fact that the meeting on May 7, the RBA left the key rate at 1.5% and did not lower it. As predicted, it is expected that the minutes to be published on Tuesday, May 21. This will reflect concerns about the labor market, showing weak inflation and lower investment, which will prepare investors to reduce rates at the next meeting.

The AUD/USD pair fell to the lower border of the channel at 0.6870/85 and technically can make a small pullback up to 0.6960/70, however, this growth will be sold out with high probability right there. Bearish pressure on the AUD remains strong. The trend reversal is unlikely, so the direction at 0.67 remains a priority in the medium term.

NZD/USD pair

Most short-term indicators indicate that New Zealand's economy will continue to slow down. In April, ANZ lowered its forecast for GDP, justifying the decline in a whole list of negative trends while the situation is developing according to the forecast.

ANZ believes that the RBNZ will cut rates again this year in August, as external conditions continue to deteriorate, and all domestic trends are either neutral or negative. In particular, activity in the manufacturing sector is declining. In the first quarter, there was a clear trend towards a slowdown in the labor market. Inflation is slowing down due to weak growth in average wages and a decrease in the trade balance.

The intensification of the trade war between the US and China may lead to a decrease in exports. Meanwhile, the RBA is able to strengthen measures to support the economy, which in one way or another will lead to a decline in the rate of the Kiwi.

After the RBNZ meeting in March, the NZD/USD pair turned to the south immediately and since then, there has been no reason to return to the growth trajectory. Kiwi is clearly aimed at a long-term low of 0.6418. The closest support at 0.6525/35 will not stand for long.