US-China trade talk headlines dominate the action

Forex

John Hardy

Head of FX Strategy

Summary:  Two direction changes overnight, first after US trade representative Lighthizer confirms Trump’s threat on new tariffs and bemoans China’s “erosion of commitments”. Later, the mood brightened again as China announced that China’s chief trade negotiator Liu He will attend talks in Washington later this week.


The energy unleashed over the weekend by Trump’s tweets on trade continues to churn sentiment. Yesterday, markets managed to cobble together a stabilisation after the downside gap in equities – and JPY crosses – to open the week. Then overnight, the mood soured again as US trade representative Lighthizer confirmed Trump’s position on tariffs and claimed that the US side had “seen an erosion of commitments by China”, language that he later made more frank: “Really, I would use the word reneging on prior commitments.”

Then early this morning the Chinese side announced that chief trade negotiator Liu He will attend talks in Washington at the end of this week. That sets up a rather clear event risk schedule for the week as we await trade talk headlines into and through Friday.  Downside risks for risk appetite would seem to outweigh upside risks. As for how to interpret the severity of this latest escalation in the temperature, some would claim that the US side is merely acting tough to make any eventual deal look like a Trump power move. A more serious and dire interpretation is that Trump is looking at his legacy and feels like a grand confrontation with China and other key countries will make his presidency one to remember, an argument well laid out by Asian Times’ William Pesek.

For FX, the risk sentiment axis clearly defined early this week in the reaction to the Tweeter-in-Chief over the weekend – bad news on US-China trade talks means a strong G3, led by JPY, and the remaining currencies react with varying beta to the downside. GBP and CHF are marching to their own beat – sterling on Brexit issues and CHF not playing the safe haven role it has in the past – suggesting structural weakness – we’ll be watching 1.1500 in EURCHF.

Overnight, the Reserve Bank of Australia proved reluctant to do the deed and cut rates as many expected (and I strongly so, given the latest US-China trade negotiations hiccup), but will be dragged to do so down the road – probably at the June meeting. The US-China trade deal news and the state of China’s stimulus are two-way risks for the Aussie from here, while the domestic economic momentum from a credit bust presents downside risks. Given the specific focus in the statement on employment data for determining the RBA’s next move – the next Australian jobs report (next week) will see an exaggerated reaction.

In EM, the Turkish lira is in fresh downward spiral on the news that President Erdogan will annul the Istanbul mayoral election results and restage these. We shouldn’t be surprised if his AKP party emerges victorious and we have to wonder if the risk of civil unrest could be added to the general theme that the principles of democracy have entirely lost their footing in the country. 

In South Africa, the ZAR is near a large resistance line around 14.50 in USDZAR ahead of elections tomorrow. The size of the ANC’s win is seen pivotal to determine the mandate ANC leader Ramaphosa will have in pushing through needed reforms and will determine the ZAR outlook in the near term.  

Trading Interest

Trade headline risks too volatile this week for USD positioning.
AUDNZD longs or NZD shorts in general ahead of tonight’s Reserve Bank of New Zealand meeting.

Chart: USDJPY

USDJPY has remained lower after the gap-wise reaction to this weekend’s shock administered by Trump’s tweets. Note how the  Ichimoku cloud has largely defined the range  since then – that’s the place to look for the next break, although to the upside, we also have the gap to the Friday close above 111.00. The JPY only seems to be able to  thrive in the teeth of a very negative market energy. 
Source: Saxo Bank
The G10 rundown

USD – the US dollar a safe haven if the US and China can’t piece together a de-escalation of the latest tariff threats from the US side by Friday.

EUR – the euro was rather resilient through the entire  risk-off episode since the weekend – may be a function of reversal of positioning in general (large euro speculative short) during these episodes, particularly in carry trades.

JPY – tends to serves as the highest beta to risk appetite when things get rough – the 110.00 area  in USDJPY the next technical level of note to the downside.

GBP – I don’t see how the market can draw strong enough conclusions on the outlook to sustain this  latest attempt at a sterling rally.  And I don’t see how prime minister Theresa May has the mandate to agree anything with anyone. Maximum uncertainty remains – could drag on sterling at these levels.

CHF – latest episode of risk off shows that CHF isn’t what it used to be in that department. Structural downside  interest in the  franc needs a breakout above 1.1500 in EURCHF.

AUD – RBA reluctant to do the deed and cut  rates, but will be dragged to do so down the road – probably at the June meeting unless the China-linked news, from stimulus to a trade deal with the US, does the heavy lifting. Given the specific focus in the statement on employment data – the next jobs report will see an exaggerated reaction.

CAD – rather  passive to the action as CAD offers lower beta to the risk-on, risk-off gyrations at the moment.

NZD – the RBNZ likely to do the deed tonight, given where expectations for a cut rate are and its recent dovish tilt. We like AUDNZD higher if so.

SEK – EURSEK reluctant to punch through higher, given we are at multi- year highs. A significant deterioration in risk appetite on concerns for the global outlook could see SEK weaker still.

NOK – a resistance line has developed in EURNOK around 9.80, but the recent rally has been so steep that it will take some doing to weaken the upside momentum. Next step will be the guidance from the Norges Bank on Thursday, with a dovish shift the risky one for adding NOK downside risk

Upcoming Economic Calendar Highlights (all times GMT)

0730 – Sweden Mar. Industrial Orders
0730 – Sweden Riksbank Minutes
1400 – Canada Apr. Ivey PMI
2350 – Japan BoJ Minutes
0200 – RBNZ Official Cash Rate
 

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