USDJPY as 3 Month Lows – Will Trade Talks Collapse or See Last Minute Salvation?

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Market Drivers May 9, 2019
US-China trade negotiators spar
Dollar-Yen hits 3-month lows
Nikkei -0.93% Dax -0.75%
Oil $61/bbl
Gold $128/oz.

Europe and Asia:
No data

North America:
CAD Trade 08:15
USD PPI 08:30

A tense night of trade in the FX market as China escalated its rhetoric against US just ahead of the Friday’s tariff deadline.

The Chinese noted that they were prepared for all possibilities but hoped that US can resolve existing problems through cooperation and consultation. Still, the Chinese noted that
if US implements tariffs, it will take necessary countermeasure but declines to comment on specifics only stating that markets should pay attention to future announcements.

It’s hard to ascertain if this is just posturing by the Chinese or a genuine threat to put up much stiffer trade barriers as retaliation for US actions. For now the markets took the words seriously and sent USDJPY to three month lows with the pair stopping just above the 109.50 support.

If the trade talks fail further risk-off flows are almost sure to follow, not only because of the immediate cost impact to the US consumers, but also because the new cold war between China and US is almost certain to curb investment plans and disrupt supply chains impacting global growth in the second half of this year.

The trade story, however, has all the markings of “Brexit-like” price action in the currency market with every headline causing up and down swings that could frustrate both bulls and bears. The Chinese are clearly interested in making a deal and are eager to avoid tariffs, but not at any cost. The US side on the other hand does not appear to be bluffing, but at the same time wants a deal as well.

That’s why the markets are cautious ahead of the next 24 hours with few traders making large one way bets, having learned from experience that negotiations may change at the very last minute.

For now, however, the mood remains undeniably sour and officials do not signal any progress by end of day USDJPY could drop towards 109.00 and drag all the yen crosses with it sending most majors lower against the buck as the day proceeds.

Boris Schlossberg
Managing Director

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