Could the end be nigh for the US-China trade war?

Today's Highlights

• ​US may need to boost inflation with rate cuts

• Commodity currencies get a lift

• Inward investment into UK falls - is there a solution?

Current Market Overview

Markets are on tenterhooks this morning on tentative “optimism” for a resolution to the US-China trade war. Markets are hopeful for some sort of agreement following the Trump-Xi summit on Saturday 29th June to avoid further escalation in the US-China trade tariffs. The Pound-US Dollar exchange rate has fallen half a cent from the interbank rate highs of 1.2750 seen yesterday.

Mixed messages from US central bank

San Francisco Federal Reserve Bank President Mary C. Daly said yesterday that she is uncomfortable with the current direction of inflation and that the coming weeks would be critical for setting the direction of US interest rates. She raised concerns about “headwinds” and discussed how weaker growth could reinforce the rationale for a rate cut. However, she also argued that monetary policy change could help “bring the economy back to potential growth,” and help reach target inflation. This news prompted selling off the Japanese Yen and Swiss Franc, as the ‘safe haven’ currency alternatives to the US Dollar markets have been turning to this past week, and commodities enjoyed a boost.

Better news for commodity currencies

On better trade news, the Australian and New Zealand Dollars strengthened against the Pound at 1.8130 and 1.90 respectively. This demonstrates how important trade is to currency markets and the Antipodes in particular, overshadowing the latest domestic economic data, which, for New Zealand yesterday, was definitely disappointing. The New Zealand ANZ Business Confidence Index figure dropped to -38.1 in June, down from -32.0 the previous month. The agriculture and manufacturing sectors have been the worst affected.

The tone for New Zealand business was again uncertain and cautious, as the ANZ noted, “The outlook for the economy is murky. As things stand, there is no reason for the economy to fall into a deep hole. However, they are concerned the economy is facing credit and cost headwinds and the global outlook is deteriorating.”

Also benefitting from rising commodity costs, the Canadian Dollar bounced last night on increasing oil prices.

UK Conservative leader candidate contemplates cuts

Meanwhile, in the UK, Jeremy Hunt has proposed a Corporation Tax cut and an increase in the cut off where UK workers start to pay National Insurance. He has also put forward raising defence spending and cutting interest on student debt. Mr Hunt's campaign said the pledges were "designed to turbocharge the economy, attracting inward investment and driving growth."

This was well timed, as yesterday’s figures from the Department for International Trade (DIT) show a sharp decline in international investment into the UK over the past few years. According to recent reports, the number of new internationally funded projects in the UK fell 14% in 2018-19. Job creation also fell by 24%.