USDJPY Melts As Drumbeat of Trade War Grows Louder

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Market Drivers June 19, 2018
USDJPY drops to 109.50
RBA Minutes offer little new
Nikkei -1.77% Dax -1.36%
Oil $65/bbl
Gold $1281/oz.
Bitcoin $6700

Europe and Asia:
No Data

North America:
USD Building Permits 8:30

Risk off flows swept through the FX market like a runway Hawaiian river of lava sweeping away all risk on pairs in its way and sending USDJPY towards 109.50 support as currency markets reacted to Trump administration’s escalation of a trade war with China.

Trump announced that he was directing the Treasury to look for additional tariffs on $200 Billion worth of Chinese goods sparking fears that China will respond in kind. Although the absolute value of tariffs may not be onerous, the political moves from both sides are creating worries that both price pressures and growth could be negatively affected leading to a general slowdown in global economic activity in H2 of this year.

The market will now await the actual announcement from Trump Administration as well as any response from the Chinese government, but regardless of the near-term actions, it’s clear that investor sentiment has been ruined as the protectionist impulses of Mr. Trump are fueling fears of stagnation and slowdown. The Trade War rhetoric goes a long towards explaining why despite US economic growth the dollar can’t sustain a rally and why the benchmark 10-year bond yield has actually contracted drifting further and further away from the 3% level.

While the greenback is up against the euro, cable and the commodity dollars those gains are much a function of the respective currencies weakness rather than any organic demand for the buck. The buck has failed to gain against the yen and the Swissie and that may be much more telling as markets remain unimpressed with the Fed’s hawkish action. In fact, the toxic combination of protectionist fiscal policy and hawkish monetary policy is ripe classic policy mistake that could tip US into a recession at a time when no one expects such an outcome.

For now the currency markets are simply reflecting a sense of caution, but it could quickly turn into panic if the political machinations get out of control.

Boris Schlossberg
Managing Director

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