Whiplash all around on trade war headlines

The major currencies are suffering serial cases of whiplash to start the week: the US dollar has changed direction twice since late last week and the yen did the same overnight in the wake of Trump’s latest broadside on tariffs. Trump intends to slap 10% tariffs on $200 billion in Chinese imports starting September 23, with the intent to move up to 25% on those imports on January 1. Increasing the temperature further, the administration threatened to slap tariffs on another $267 billion of Chinese goods if Beijing retaliates. 

As we are writing this, China has vowed simultaneous tariffs in retaliation, and the overnight move in turn suddenly came under fire. It’s all a bit exhausting to follow minute-by-minute, but after this latest exchange, it’s clearly important to wait to see how markets settle for a session or two for a measure of the market’s temperature.

With the trade war issue afoot, other factors pale to insignificance, but we remind traders to continue to watch US and global bond yields as a key input here – particularly as a possibly driver of JPY weakness if there is no general “run for the hills” moment on the trade showdown.

The US 10-year yield managed to test above 3.00% in recent sessions and perhaps more interesting, European yields are on the move as well and also reaching pivotal levels – the 0.50% yield level in the German 10-year bunds in particular look important.

The day ahead features little on the economic data calendar as we await key emerging market central bank announcements tomorrow (Brazil) and Thursday (South Africa) and it feels like animal spirits are in charge of this market

Chart: AUDJPY

AUDJPY is emblematic of the price action overnight, where Trump’s fresh trade threats saw the typical JPY-strengthening knee-jerk reaction before confidence returned for whatever reason overnight and especially the Japanese market shrugged off the massive scale of the US-China showdown. Then China’s retaliatory announcement this morning saw the JPY rallying once again. We’ll have to see how the day settles, as a strong close near the day’s highs could suggest a further short term squeeze higher in Aussie crosses, while a close back near or below 80 today or tomorrow would suggest that we have merely just seen a misleading fireworks display.