Tariff Man boosts the buck, slams stocks

John Hardy

Head of FX Strategy

Summary:  Trump’s loud support of tariffs broke the back of the G20-inspired rally. The gutting of risk sentiment boosted the greenback across the board, with the Japanese yen safe-haven bid firing inconsistently. AUD was the weakest of G10 currencies overnight on a GDP miss.


US President Trump declared himself a “Tariff Man”, touting the efficacy of tariffs yesterday. In reply, the markets voted with a loud thumbs down, scotching the entire post-G20 rally and then some on weakening confidence that this loose cannon of a president can cobble together a coherent or stable trade deal with China. For its part, China took exception to some of the uncertainty on whether anything at all was agreed at the G20 by trying to reassure that it will push on with trade negotiations. Interesting that this reassurance provided very little support overnight.

In the wake of yesterday’s developments, we are left with a much stronger US dollar, decimated risk appetite and lower US yields all along the curve, with a powerful yield curve flattening garnering increase attention as long US yields drop and look to have posted a major reversal. The Japanese yen did play a safe haven role yesterday, cutting a swath of strength across the G10 yesterday before fading a bit overnight. 

Today, US markets are closed to honor former President George H. W. Bush’s passing. 

A pivotal day for the UK yesterday. Early in the session, sterling rallied steeply from close to recent lows after an EU court advisory body indicated that the UK could pull out of Brexit unilaterally, effectively meaning that the UK-EU relationship could revert to pre-referendum status quo. But later, the sterling rally reversed as Prime Minister May was found in contempt by parliament for withholding information, and in another vote, parliament established that it will now have more control over the Brexit endgame if May’s deal heads toward what looks an inevitable rejection next Tuesday. 

We have a Bank of Canada meeting on tap, but expectations are minimal for a rate move this time around and there is no press conference at this meeting. The choppy USDCAD has reversed course once again and is looking back toward the range highs just south of 1.3400.

Chart: GBPUSD

Cable has been teetering on the brink here after May’s no-good, very bad day yesterday, a day in which parliament found May in contempt and will have far more leeway than previously in controlling the Brexit endgame. A close below the prior low potentially opens up the range to 1.2000, although GBP will remain vulnerable to headlines of either stripe at all times, as yesterday made rather clear, and traders are likely reluctant to commit to trades outside of the options market, fearing the choppy conditions from day to day.

Enlarge
Source: Saxo Bank

The G10 rundown

USD – the greenback rallying only as a function of safe haven seeking – for a return of weakness, risk sentiment needs to improve again.

EUR – the EU and euro at risk from the Brexit endgame as well and even more so the next recession as German bund yields are scraping new lows below 25 basis points this morning.

JPY – yesterday’s steep rally yielding to a partial retreat today, showing a rather inconsistent firing of what used to be a reliable safe haven bid for the yen. Is the JPY changing its stripes somewhat? Too early to tell…

GBP – the endgame is approaching for Brexit and the outlook is as hazy as ever. May’s deal won’t pass parliament, but what then? The odds are rising that we will have a fudge/delay on the March 29 deadline next year. I can’t see a second referendum because there is no clear “either-or” option to present to the UK population.

AUD – a triple whammy for the AUD overnight on withering hopes for a US-China trade deal, weak risk appetite and a miss on the Australia Q3 GDP (+0.3% QoQ vs. +0.6% expected).

CAD – our operating assumption is that USDCAD offers weak beta to further USD strength. Instead, we like to focus on CAD in the crosses, particularly AUDCAD here, which may have turned a corner.

NZD – AUDNZD takes out the 1.0600 area trendline on the missed GDP print overnight, but NZDUSD looking vulnerable up here above the 0.6900 level if we can’t get US-China trade deal hopes back on the rails.

SEK – EURSEK reluctant to break lower when markets suffer the degree of market volatility and weak risk sentiment seen yesterday. Still, the pair trades heavily and could shift to 10.10-10.00.

NOK – the oil rally faded yesterday as did the NOK rally. Next week looks pivotal with Norway’s November CPI up on Monday, GDP on Tuesday and a Norges Bank announcement on Thursday.

Upcoming Economic Calendar Highlights (all times GMT)

US Markets closed today for US President George H. W. Bush memorial
0900 – Eurozone Nov. Final Services PMI
0930 – UK Nov. Services PMI
1000 – Eurozone Oct. Retail Sales
1500 – Canada Bank of Canada rate decision
1900 – US Fed Beige Book

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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