Trump Follies Foil The Dollar, But Not For Too Long

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Market Drivers April 6, 2018
Trump Threatens more tarrifs
USDJPY holds 107.00
Nikkei 0.11% Dax 1.63%
Oil $63/bbl
Gold $1328/oz.
Bitcoin $6800

Europe and Asia:
No Data
North America:
USD NFP 8:30
CAD Labor Employment 8:30

The typically sleepy pre-NFP session was rocked by news that Trump administration would consider impose=ing another set of tariffs on China, this time to the tune of $100B as part of its continuing effort to improve the trade position of US.

The markets reacted violently to the news with Dow equity futures diving 500 points lower while USDJPY quickly dropped to the 107.00 level. But with China away on holiday and no official counter-response from the Middle Kingdom coming, the buyers poured back into the pair and drove back up to 107.40 by midday Tokyo dealing.

The Chinese news agency offered a measured critique of the new Trump proposal, stating that China’s resolve to protect global trading rules is strong and that there was still time to resolve the issues through negotiation.

It’s too early to tell if China will try to de-escalate the conflict which is clearly creating consternation in Beijing. It’s highly unlikely that Chinese authorities will acquiesce to Mr. Trump’s demands without putting up a fight, especially in a highly authoritarian Asian society where saving face is such a powerful cultural norm.

The assumption in the market is that Mr, Trump is bluffing and that he is simply using the threat of tariff to establish a negotiating stance with the Chinese. That’s why after the initial selloff USDJPY rallied almost back to its highs. But the story, as Mr. Trump has shown, is far from over.
If the Chinese come back next week with a tangible response, the negative reaction could be far more intense.

Meanwhile, the quasi-trade wars have pushed the NFP report to the background, but the release tomorrow will still play a role in market flows. Aa our colleague Kathy Lien noted, “Considering the recent strength of the dollar, investors are positioning for a stronger labor market numbers but there’s also plenty of room (in wage growth and the jobless rate) for a downside surprise, which makes trading NFP this month is particularly difficult. At the same time, it means there should be big reaction depending on the direction of the surprise. If payrolls exceed 200K, wage growth rises by 0.3% and the unemployment rate falls as expected, USD/JPY will break 108 easily. However, if wages rise by only 0.2%, the unemployment rate holds steady and payrolls are 200K or less, we should see USD/JPY below 106.80.”

Boris Schlossberg
Managing Director

One thought on “Trump Follies Foil The Dollar, But Not For Too Long”

  1. Hi, some interesting but widely ignored facts:

    • US trade deficit figures include interest rate expenditures. China and Japan own massive amounts of US debts, so US trade deficit numbers will definitely increase – especially with higher rates. So when people talk about trade deficit they do not seem to realize that the fast increase in Gov debt is the bug elephant in the room?

    • USA trade share of its GDP is modestly around 25%, while China has around 35% and Germany above 80%. So why would the US economy and the dollar suffer most from a trade war?

    • US has about 70% ratio debt/GDP, while EU is above 100% on average. In the same time Bloomberg reported that the dollar bulls are close to extinction. The debt ratios seem to be ignored by the dollar bears?

    • FED owns below 10% of US Treasury debt, while ECB owns above 40% of all Gov debt. BoJ owns also about 40%. So FED is relatively in much better shape. Both ECB and BoJ will not be able to stop repurchasing the expiring Gov debt, because the Gov interest costs would bring down their economies belly-up. BoJ and ECB have around zero interest rates, or even minus, which will create No Bid if/when tapering of QE would actually take place. It seems that Draghi is cornered and realizes that he cannot normalize rates nor taper his massive debt purchasing programme?

    • US bond yields are very much higher percentage-wise than Germany’s bund yields and even compared to Southern EU. This is despite the above figures all pointing to a higher risk in Euro than in USD.
    This dysfunct rate pricing will soon bring down the Euro currency once the big cap investors realize that the problem is not the FED but really the unsustainable sovereign debts in EU, China and Japan?

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