Trump Follies Foil The Dollar, But Not For Too Long

Market Drivers April 6, 2018
Trump Threatens more tarrifs
USDJPY holds 107.00
Nikkei 0.11% Dax 1.63%
Oil $63/bbl
Gold $1328/oz.
Bitcoin $6800

Europe and Asia:
No Data

North America:
USD NFP 8:30
CAD Labor Employment 8:30

The typically sleepy pre-NFP session was rocked by news that Trump administration would consider impose=ing another set of tariffs on China, this time to the tune of $100B as part of its continuing effort to improve the trade position of US.

The markets reacted violently to the news with Dow equity futures diving 500 points lower while USDJPY quickly dropped to the 107.00 level. But with China away on holiday and no official counter-response from the Middle Kingdom coming, the buyers poured back into the pair and drove back up to 107.40 by midday Tokyo dealing.

The Chinese news agency offered a measured critique of the new Trump proposal, stating that China’s resolve to protect global trading rules is strong and that there was still time to resolve the issues through negotiation.

It’s too early to tell if China will try to de-escalate the conflict which is clearly creating consternation in Beijing. It’s highly unlikely that Chinese authorities will acquiesce to Mr. Trump’s demands without putting up a fight, especially in a highly authoritarian Asian society where saving face is such a powerful cultural norm.

The assumption in the market is that Mr, Trump is bluffing and that he is simply using the threat of tariff to establish a negotiating stance with the Chinese. That’s why after the initial selloff USDJPY rallied almost back to its highs. But the story, as Mr. Trump has shown, is far from over.
If the Chinese come back next week with a tangible response, the negative reaction could be far more intense.

Meanwhile, the quasi-trade wars have pushed the NFP report to the background, but the release tomorrow will still play a role in market flows. Aa our colleague Kathy Lien noted, “Considering the recent strength of the dollar, investors are positioning for a stronger labor market numbers but there’s also plenty of room (in wage growth and the jobless rate) for a downside surprise, which makes trading NFP this month is particularly difficult. At the same time, it means there should be big reaction depending on the direction of the surprise. If payrolls exceed 200K, wage growth rises by 0.3% and the unemployment rate falls as expected, USD/JPY will break 108 easily. However, if wages rise by only 0.2%, the unemployment rate holds steady and payrolls are 200K or less, we should see USD/JPY below 106.80.”