Muted FX response to latest trade tiff and confusion

Clare MacCarthy

Senior Editor, Saxo Bank
Clare MacCarthy first joined Saxo Bank in 2012 to work as a senior editor on TradingFloor.com. Prior to this, she worked as a Denmark-based foreign correspondent for The Economist and the Financial Times and also served as Copenhagen bureau chief for Dow Jones Newswires.

Trade war-inspired risk aversion has swept across financial markets in response to the latest clash in Trump's trade war but while the reaction in forex markets has been subdued, equities have taken a hammering as investors seek to sort rumour and reality.

"The story that seems to be the driver across markets is this latest supposed threat from the US side to restrict inbound investment in key industries. This was a widespread report and then towards the end of yesterday's session we saw US denials that it was aimed specifically at China," says John J Hardy, Saxo's Head of Forex Strategy. 

However, even though this latest twist in the trade saga has triggered a wave of risk aversion, the reaction in FX markets was rather muted, and, Hardy says, the Japanese yen is likely taking its cues from US yields rather than trade tiffs for now. "In the longer term, a trade war is definitely a weak-dollar story and we look for an eventual transition back to dollar weakness. The question here locally is whether that is now or if that would be a bit premature," Hardy says.

But while the dollar seems to be ticking along in cruise control (for now), real pain is being felt in equity markets with Asia having tracked Wall Street's dive lower yesterday. "What an ugly session for equities," says Peter Garnry, Saxo's Head of Equity Strategy, adding that the CSI 300 is in bear market territory, Chinese stocks are taking a beating and emerging markets are under intense pressure.

Commodities, too, are still held captive by the trade war fears though the general risk off sentiment is failing to ignite gold as it is burdened by a deteriorating technical outlook, reports Saxo's Head of Commodity Strategy, Ole Hansen. A "death cross" (where the 50-day moving average falls beneath the 200-day one) on the chart is attracting quite a bit of interest, Hansen notes.

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