FX: U.S. President Keeps Market Off Balance

h2 Kathy Lien, Managing Director Of FX Strategy For BK Asset Management/h2

Thanks to US President Trump whose tweets keep the market off balance, it was a wild ride for currencies overnight. Pairs like USD/JPY and AUD/USD gapped lower at the Asia open after President Trump said he regrets not raising tariffs on China higher. Then all of the gaps were filled by NY when Trump said, “China called twice” to get back to the table and restart trade talks in the early European session. It's incredibly difficult to trade in a market like this where news bombs can easily trip off big moves in currencies because if China officially denies those calls, the recoveries will disappear quickly. A spokesman for China’s foreign ministry said he didn’t know what Trump was talking about. When pressed by reporters, he said, “I don’t want to talk about calls.” So it's not out of the realm of possibility that trade talks did not turn a corner overnight.

Regardless, the recovery in the Dow Jones Industrial Average and u-turn in USD/JPY tells us that investors are giving Trump the benefit of the doubt – even after he said he would “only make a deal with China if it is fair to the U.S.” Given how quickly and how often Trump changes his tune, we are dubious of the recovery and skeptical that trade talks have really turned a corner. There’s been no acknowledgement from China that talks have resumed. Instead, state news agency Xinhua said over the weekend, “When the U.S. side tried to intensify trade bullying and exert maximum pressure on China, it only strengthened China’s resolve, making China stand more firmly against the U.S. bullying, and defend its legitimate rights and interests.” Unless China verifies the calls and kowtows to the US, which is extremely unlikely, we do not expect a lasting recovery in USD/JPY.

With that said, we trust that US trade relations with Japan and Europe improved after this weekend’s G7 meeting. Trump said he is “very close” to a possible trade deal with China and not looking at auto tariffs on Japan at this time. It's reckless to have one trade war going, let alone three. Regardless, the reduced risk of tariffs should benefit the euro because it is one of the greatest uncertainties for the region. According to the IFO Business Climate Index, which fell to its lowest level since 2009, businesses are growing more concerned about a recession in Germany. A number of countries have also been talking about individualized trade deals with the UK but sterling remains under pressure as the odds of a no-deal Brexit grow.

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On a technical basis, there are signs of a bottom in AUD/USD. After dropping below 67 cents overnight, the pair verticalized to end the day sharply higher. Aside from the recovery in risk appetite and the re-inversion of the US yield curve, there’s no real reason for Australian dollar’s strong rally. The New Zealand and Canadian dollars also moved higher but far less aggressively than A$. Gains in NZD were limited by significantly weaker-than-expected trade numbers. Not only did the country’s trade surplus turn into deficit but it was almost 3 times worse than expected. USD/CAD is also on the cusp of a turn. Having traded lower 2 days in a row, we could see a stronger reversal down to 1.3200.

Written By: Kathy Lien