FX Update: Trade war headlines intensify market gyrations FX Update: Trade war headlines intensify market gyrations FX Update: Trade war headlines intensify market gyrations

FX Update: Trade war headlines intensify market gyrations

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Nerves have calmed to start the week after China’s chief trade negotiator Liu He spoke against escalation and Trump indicated China called in hope of restarting talks. But the path to a steady de-escalation of the trade war will prove difficult after the latest steep rise in temperature.

Trading interest

  • Maintaining EURJPY shorts with stops lowered to 118.50. Targeting 112.00
  • Maintaining AUDNZD longs with stops below 1.0500
  • Squaring USDCAD longs near breakeven

A brief recap of the action since Friday: China declared tariffs on a $75 billion of US imports just ahead of Fed Chair Powell’s speech. That speech was a rather dry fretting of the fault in the Fed’s stars (r* the appropriate Fed neutral rate and u*, the natural rate of unemployment), giving the entire issue of budget deficits forcing Fed policy no real attention. On trade, the speech merely presented the trade issue as an unprecedented risk that complicates the Fed’s assessment on policy. The combination of China’s escalation, timed for maximum impact, and Powell’s lack of hints that the Fed is accelerate its rate cutting, set off the Trump tirade against the Fed and China that I won’t recap here. The bottom line: the Fed doesn’t understand that it’s new job is to be Trump’s currency warrior and immediately cut rates 100 basis points or more and restart QE. It will get there eventually.

With Trump now having declared the Powell Fed as his sworn enemy and “ordering” US companies out of China (a US president may have the right to order this under the 1977 International Emergency Economic Powers Act), there are two critical questions: One – how long before Trump’s team seizes the initiative from the Fed by ordering the Treasury into action on the US dollar, which it can do at any time – i.e., there is a growing material risk of outright US dollar intervention.  Two – the path to any climbdown from the latest trade escalation will prove difficult, if not impossible, strengthening the grip of the “descent into a cold war” narrative.

Fortunately, markets were not open for trading while Trump struggled to communicate with the press on the sidelines of the G-7 summit this weekend, where at first it sounded as if Trump has second thoughts about escalating trade tensions before a later statement from his representatives said he only regretted not setting tariffs even higher.

Meanwhile, the G-7 meeting in Biarritz saw the US and Japan making a promising agreement-in-principle on trade issues. Given Japans hope of avoiding negative US attention, this is likely to suppress Bank of Japan activism any time soon – opening up a continued path of JPY strength as long as risk appetite remains wobbly and yields low. Europe, on the other hand, is increasingly at risk of new trade policy escalation from the Trump administration.

Ironically, the Bank of England’s Carney addressed the dysfunction of the USD as the world’s chief global reserve and currency in his speech and proposed a new virtual currency similar to Facebook’s Libra proposal to deal with this issue. A new reserve currency is indeed desperately needed, but with multilateralism on the wane, how is a process to be set in motion toward this goal.

The first order of business this week will be the US and Trump administration response to China’s Liu He overture (Update: as I am still writing this post, Trump says that China called and wants to restart trade talks…again underlining the two-way headline risk). The yuan fix was set at nearly unchanged levels relative to Friday, but the spot USDCNY rate rose around 70 bps to a new high near 7.15 overnight.

No surprise to see that JPY crosses are moving with the most beta (of the non-hard currencies at least, as gold volatility has risen the most of late) to sentiment swings linked to the escalation of the US-China trade war and just before we take the chart snapshot, news that Trump says China wants to resume trade talks. USDJPY touched near the key long-term support around 104.50, but there is little to hold back the progress lower toward 100.00 as long as risk appetite is wobbly and lower yields threaten.

Source: Saxo Bank

The G-10 rundown

USD – no heavy data releases this week and it’s not about the data anyway. September 1 tariffs are a key question if the US and China are to actually sit down and talk.

EUR – expectations are rising of a big easing move from Draghi and company at the September 12 ECB meeting – but all of the EU questions are fiscal and no progress on that front. Germany August IFO up later this morning.

JPY – the yen all over the map overnight, first on the strong side to absorb the further escalation in the trade war over the weekend, and then sloshing back to the weak side on hopes that something can be salvaged from the wreckage. Trading yen here requires nerves of steel.

GBP – Boris Johnson managed to avoid any notable gaffes or other missteps at the G-7 meeting, allowing sterling to open a bit stronger – next key for the path lower in EURGBP is the 0.9000 area.

CHF – weak risk sentiment and low yields keeping CHF correlated with JPY direction.

AUD – the Aussie directly impacted by risks to Chinese economy from latest tariff escalation.

CAD – the loonie offers weak beta to risk appetite gyrations, and solid data late last week offers some support (higher than expected core CPI and the strong June retail sales data reported Friday.)

NZD – the trade war escalation felt first in AUDNZD, frustrating the bulls for now. Key support for the move higher down into 1.0500 area

NOK and SEK – risk off generally not supportive for the Scandies. Both EURNOK and EURSEK in pivotal areas at 10.00 and 10.80, respectively.


Upcoming Economic Calendar Highlights (all times GMT)

  • 0800 – Germany Aug. IFO Survey
  • 1230 – US Jul. Preliminary Durable Goods Orders
  • 0250 – Australia RBA’s Debelle to Speak

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.