Risk FX Ready to Rock in Post Holiday Trade

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Market Drivers July 5, 2018
Risk on spurred by US suggestion of zero tariffs on autos
All eyes on US data
Nikkei -0.78% Dax 1.10%
Oil $74/bbl
Gold $1253/oz.
Bitcoin $6600

Europe and Asia:
EUR EZ Retail PMI 51.8 vs. 51.7

North America:
USD ADP 8:15
USD ISM Non-Manufacturing 10:00
USD FOMC Minutes 14:00

A surprise suggestion by the US to lower tariffs to zero on auto imports and exports between US and EU helped fuel a risk on rally in early London dealing today as investor sentiment improved markedly in post US holiday trade.

Media reports stated that over the US July 4th holiday, US Ambassador to Germany in a meeting with German automakers suggested that both EU and US drop the tariffs to zero on the auto sector. Currently, US imposes a 2% tariff on EU cars while EU imposes a 10% on US imports. The disparity has been a massive source of friction with Trump administration threatening to impose similar tariffs on EU autos which created massive anxiety in the German automotive sector for whom US remains one of the largest export markets.

The zero tariffs suggestion was welcomed by the market with DAX rising 1.1% in response and EURUSD popping to 1.1700 before retreating off the highs. While no formal deal has been announced, its clear that both sides want to avoid a full-on trade war that could cast a pall over the global economic recovery and if the zero tariffs proposal actually becomes fact it would be cheered by the markets as it would lower the friction costs of trade and show an improvement from the current conditions.

With US holiday behind us, market attention will turn to US data with ADP and ISM Non Manufacturing on the docket today. The consensus view on ADP is a rise to 190K from 178K the month prior, while the ISM is expected to slip slightly to 58.3 from 58.6. Generally, the US economy appears to be firing on all engines, with the ISM Manufacturing earlier this week showing a surprise to the upside. Presuming the data comes within forecast, the news should help USDJPY rally further with longs targeting 111.00 as the day proceeds.

Nevertheless, the specter of trade war still hangs over the market and tomorrow will mark the start of additional 34B of US tariffs on China and the market will wait with baited breath to see what retaliatory measures will come from the Chinese. The tit for tat maneuvers may overshadow any good news from the NFPs if the markets become concerned about the escalation of hostilities between US and China. For now however, the risk on sentiment remains in the market and both EURUSD and USDJPY could see a bit more follow through when US desks come online.

Boris Schlossberg
Managing Director

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