Trump tariff threat sparks global risk off

John Hardy

Head of FX Strategy, Saxo Bank Group
John Hardy joined Saxo in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

US President Trump threatened to levy a 10% tariff on an additional $200 billion in Chinese imports if China chooses to retaliate against the first round of tariffs. This move triggered an all out rout in equity markets, particularly in China and emerging markets. The US equity market was also in for its worst performance in a while and the S&P500 is staring down an interesting support zone soon if it continues lower. 

While we have seen a steady pickup in some risk indicators recently, including in corporate credit and in EM credit spreads, it has been rather stunning to witness the very low volatility in both the US equity market and FX, but yesterday’s session may finally be a sign that the complacency is clearing. Given the position that the two sides in the showdown have staked out, it is difficult to see how either side will back down from its position – China because it wouldn’t want to be seen as bullied by Trump and Trump because his position taps into popular sentiment and is likely to remain a popular theme in the election cycle. 

Paul Tudor Jones has been on a rare (unprecedented?) publicity tour as he is launching a theme-based ETF and was interviewed by Goldman Sachs head Lloyd Blankfein yesterday. A macro hedge fund legend, his thoughts are always worth listening to, and he has a strong opinion on the risks from derivatives and from central bank policy having kept rates too low for too long. Very interesting comments as well on the lack of “stabilisers” when the next recession hits. In another recent interview, he has sounded more upbeat on the near-term potential for markets even despite these longer-term concerns.

Chart: USDJPY
The sudden injection of volatility overnight in JPY crosses on the risk-off move sees the yen reviving its status as a safe haven when volatility picks up – a pattern we are so accustomed to from the past, but one that has revealed itself less consistently of late as one could make the argument that Japan’s export-oriented economy would suffer a severe blow in a trade war scenario. But the risk in the near term is that the capital account is the dominant force as all of those yield-seeking Japanese savings that were sent to higher yielding EM and other shores risk repatriation if the uncertainty worsens.

Source: Saxo Bank

The G-10 rundown

USD – the US dollar looks to remain firm as long as this bout of weak risk appetite continues, though the JPY could outperform and the focus could be more on less liquid currencies’ weakness rather than pairings against a more liquid currency like the euro.

EUR – a test of the 1.1500 area and possibly a bit more looks in the cards, though an aggravation of the current risk off could ease some of the focus on the weak EUR (note the euro’s performance against the G10 smalls over the last couple of sessions.) Merkel has two weeks to sort her coalition partner out and has called for an EU summit on immigration.

JPY – the yen is making a statement like it hasn’t done in some time and this fits well with its normal tendencies to do well in violent fits of safe haven seeking. Note the likes of an AUDJPY poking towards big chart levels on the downside this morning. This could get ugly as we have yet to see a more profound bout of risk off.

GBP – sterling has nothing positive to say in this environment and the Bank of England is hardly likely to wax hawkish relative to expectations in this backdrop. GBPUSD is poking at the lows of the cycle this morning.

CHF – the Swiss franc is proving its old safe haven status, boosted in particular this week by the threat to Merkel’s leadership in Germany. The 1.1400 level in EURCHF looks pivotal and the Swiss National Bank could feel under siege this Thursday and not want to send any signals on eventual policy normalisation.

AUD – no mercy for the Aussie as trade wars and an intensifying weakness in Chinese markets and Asian EM, as well as key commodities prices, has seen the AUD singled out. 

CAD – the CAD is firmer than the more China-exposed AUD, but USDCAD has recently broken well free of the 1.30-1.31 zone and could look much higher here, particularly if oil ends the week on a sour note over the OPEC meeting outcome (although “NOPEC” also meets Saturday, so early next week is the critical phase for oil).

NZD – the focus has been more on AUD, but the little NZD can hardly expect to avoid a negative focus in this environment and NZDUSD could be in for a significant drubbing if the May lows towards 0.6850 are taken out.

SEK – EURSEK has thoroughly rejected the downside and SEK will likely continue to suffer as an illiquid currency with a punishing policy rate and an economy highly leveraged to exports, particularly into the increasingly wobbly EU.

NOK – weak oil prices and risk off are not the stuff of NOK upside as EURNOK looks in danger of creeping back up into the higher range if the risk backdrop remains unsupportive and the Norges Bank doesn’t shift expectations sharply higher.

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