Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Probably the point of maximum good news for the USD.
John J. Hardy
Global Head of Macro Strategy
Summary: It’s hard to understand how the news on the trade war front can improve any further from here as the US and China announced a huge step-down on the high mutual tariff levels for 90 days.
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The US-China step-down from the high tariffs for at least 90 days was the even-better-than -expected news that the market got on top of already positive expectations for this weekend’s trade talks in Switzerland. Specifically, the US will step down to 30% and China to 10% from the former levels of up to 145%/125%. This saw another surge of USD strength that took out local resistance levels and stops. But I wonder if this move can hold much beyond today as we were already pricing for very good news and now the best possible news has now been crystallized – with long term uncertainty still very much in play. This could end up proving a sell-the-fact moment for the US dollar in the big picture. Still, there is a risk to EURUSD to 1.1050 if 1.1200 can’t be regained very soon and USDJPY to 149+ if 146.00 or lower can’t be regained.
The most pronounced USD upside has been versus the Japanese yen, as US yields have risen further. That “risk-on, long yields up” combo is a double whammy for JPY weakness. Now we have not only USDJPY challenging above key resistance (more below), but GBPJPY bulling up above 194.00 and EURJPY challenging above 164.00 at times overnight as well. The JPY will only find fresh bids if the tone and focus change here, either in the direction of trade tensions rising again or if US data begins to turn more negative. On that last note, we may have to wait for the May economic data cycle at minimum and possibly also the June data to get a better read on the US economic trajectory, though we will be sensitive to data this week like the US Retail Sales for April up on Thursday if it surprises strongly.
Chart: USDJPY
USDJPY blasted through the key 146.50 area, theoretically leaving the path open to the 200-day moving average just below the big round 150.00 level, though that would likely require a significant challenge higher in US treasury yields – which will be sensitive to US data releases in coming week. US 10-year yields may have a hard ceiling not far above 4.50% as these levels could draw the attention of US Treasury Secretary Bessent, who might already be considering next steps that will help engineer lower yields, like allowing US commercial banks to hold more US treasuries without impacting their leverage ratios or balance sheet size. That would certainly impact the US dollar as well.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
JPY weakness is intensifying, while the US dollar momentum continues to shift hard to the upside on the news today. The CHF is proving surprisingly resilient here, while gold is losing altitude, if modestly so given the wild ride in equities.
Table: NEW FX Board Trend Scoreboard for individual pairs. EURGBP has jolted to new lows to start trading this week as our trending indicator has slipped to negative for that pair – the outlook there likely highly dependent on continue strong global risk sentiment. AUDNZD is also rallying hard on today’s news and will flip to positive today if the move holds. Note the other AUD crosses also trying to flip as well.
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