FX Sentiment Sours on US-China and Brexit News

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Market Drivers October 8, 2019
US-China retaliation turns market risk negative
Enthusiasm on Brexit deal wanes
Nikkei -0.16% Dax -0.10%
UST 10Y 1.55%
Oil $53/bbl
Gold $1499/oz
BTCUSD $8173

Europe and Asia:
EU GE Industrail Production 0.3% vs. -0.1%

North America:
USD Core PPI 8:30

After a positive risk session in Asia FX flows flipped completely on news that China may retaliate against US companies after the US announced that it would blacklist eight Chinese high tech companies on human rights violations grounds.

The news completely reversed the feel-good vibes from yesterday after China announced that they were ready to do a partial trade deal with the US. The escalation of tensions ahead of an important round of trade talks is not an encouraging sign and markets reacted accordingly sending USDJPY towards the 107.00 figure.

It will remain to be seen of just how much of dark cloud this latest development will be but if China announced retaliation against major US high tech names like AAPL it could quickly send stocks plummeting and drag USDJPY well below the 107.00 level as the day proceeds.

Meanwhile in the UK enthusiasm about a Brexit deal continued to wane as two sides were still too far apart on the Northern Ireland backstop issue. Ultimately neither side wants to cede sovereignty over the territory and officials are increasingly pessimistic about a deal before the deadline.

Even if no deal is possible, PM Johnson is compelled by the Benn act to ask for an extension so market hopes for some sort status quo remain in place – thus the hold above the 1.2200 figure for cable. But the situation remains fluid and increasingly negative which suggests that the asymmetric risk for sterling may be to the downside.

For today, the focus will be on US-China news as markets await any retaliation announcements from Beijing with both equities and risk FX vulnerable to further selloff.

Boris Schlossberg
Managing Director

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