USDJPY is the First Casualty of the Trade War

Market Drivers March 23, 2018
Risk aversion dominates trade
USDJPY tests 105.00
Nikkei -4.51% Dax -1.53%
Oil $65/bbl
Gold $1341/oz.
Bitcoin $8470

Europe and Asia:
No Data

North America:
USD Durable Goods 8:30
CAD Retail Sales 8:30

USDJPY broke below the 105.00 level in early Asia trade for the first time in 16 months as risk aversion waves swept through the FX market in the wake of competing tariffs announcements from China and US.

Asian and European equities followed US markets lower as investors feared that the recent spate of protectionist announcements by the Trump administration would trigger a trade war that could cast a pall of doubt on global growth this year.

For its part, China showed little inclination to back down in the wake of US announcements of tariffs on more than $60 Billion worth of goods and services. In a statement, the Chinese noted that,”China does not want a trade war with anyone. But China is not afraid of and will not recoil from a trade war. China is confident and capable of facing any challenge. If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.”

The latest news puts the two biggest economies at loggerheads with each other, but the question going forward is whether this conflict is real or just theatrical. Both countries have a lot to lose from an all out trade war that is very likely to slow down growth and create social unrest. There is no doubt some furious diplomatic negotiation is going on behind the scenes and so far the actual economic threat of tariffs from both sides had been minimal.

In the end, this may be yet another Trump administration ploy of all show no substance politics, but in the meantime, the markets are on edge and with USDJPY below the 105.00 figure Japanese officials are clearly worried and have already started to jawbone the pair higher. Japan seems to be the primary casualty in the trade war so far as the double whammy of higher currency exchange rate and growing protectionist impulses across the globe could unwind most of the recent successes to stimulate growth and beat back deflation. If the pair makes move lower towards 103.00 expect the rhetoric from Tokyo to heat up markedly.