Trade War On But Risk FX Rallies

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Market Drivers July 6, 2018
Risk on despite tariffs
NFP Ahead
Nikkei 1.12% Dax 1.19%
Oil $73/bbl
Gold $1255/oz.
Bitcoin $6500

Europe and Asia:
No Data

North America:
USD NFP 8:30
CAD Labor 8:30
CAD Ivey PMI 10:00

As promised, US imposed tariffs on $34B worth of Chinese goods today, but China has yet to respond in kind prompting a risk on rally in FX with EURUSD, Aussie and kiwi all rising in afternoon Asian trade.

The reaction in the currency markets was a classic “sell the news” response as risk on flows took off despite the tariff action by the US. With most of the new priced in, risk FX saw a short covering rally that was further boosted by the restrained Chinese response.

It’s unclear what the Chinese will do next, but policymakers in Beijing appear to be torn between saving face and letting the trade conflict spin out of control. Still Mr. Trump is never one to back away from a fight and has already threatened to levy tariffs on further $14B worth of goods in several weeks so the Chinese will likely impose a fresh set of tariffs of their own or perhaps opt for a softer, but in the end much more damaging policy of creating barriers for US multinationals in the Chinese domestic market. China is already the largest market for car and automobiles and any regulatory harassment of US firms is likely to have a chilling effect on corporate profits of US multinationals.

Still, the markets are taking the current situation in stride on the assumption that the worst of the skirmish may be over.

In North America today, the focus will turn to NFPs with the consensus view that payrolls will come in somewhere between 180-200K. Both ADP and the employment component of ISM Non-Manufacturing came in below expectations, but a slight miss on jobs is unlikely to shake the market. The focus instead will be on wages with analysts looking for a solid 0.3% increase this month. Anything less than that will be viewed as a disappointment and could send USDJPY towards the 110.00 figure, but a solid print should push USDJPY through 111.00 as market expectations of 4 rate hikes by the Fed will ratchet up.

Boris Schlossberg
Managing Director

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