It has been a very busy week for President Trump. On Sunday, he announced fresh tariffs on China, on Tuesday he ordered the Treasury to label China a currency manipulator, on Thursday he blasted the government's strong dollar policy and on Friday, he said the US is not going to do business with Huawei and called on the Fed to lower interest rates by a full percentage point. Although it was later clarified that he meant he would be banning the federal government from doing business with Huawei and not US businesses, the damage was done. It is clear that President Trump has no plans to make a deal with China this far from the 2020 election. He's on a rampage to show his constituents that he's fulfilling the promises that he's made in 2016 and in doing so he's hurting the markets and the US dollar.
Its only a matter of time before USDJPY breaks 105 and it could happen next week if US retail sales and consumer prices fall short of expectations. In fact, its completely feasible for USD/JPY to hit 100 before the end of the year. However while USDJPY has fallen 6% over the past 4 months, the decline in the trade weighted dollar index is more modest. Even though DXY took a big hit this month, its still up 1.5% for the year. The sharp sell-off in the dollar last week was felt against the euro, Japanese yen and Swiss Franc but sterling, the Australian, Canadian and New Zealand dollars performed worse than the greenback as Trump's antagonism towards China hits these countries harder. If his fury shifts to Europe, the single currency won't be immune to the risk aversion.
As we head into the weekend it is important to take stock of the implications of Trump's latest moves. The tariffs have the most significant effect because it has a direct impact on US businesses and the Chinese economy. Stocks and earnings will suffer as the slowdown in global growth worsens. However Trump's talk of wanting a weaker dollar and the Treasury's currency manipulator label has more symbolic than economic consequences. It mandates the Treasury to "take action to initiate negotiations" and work with the IMF to remedy the problem and if no agreement is reached, the US can impose further penalties and restrict US government business with China. If he so desired, Trump would have hit China with more tariffs with or without the currency manipulator label.
Currency intervention is also a bad idea because it drives up prices, creates more volatility in the markets and makes the Fed's job more difficult. If Trump's primary goal is to pressure the Fed to cut interest rates further, he's accomplished that by escalating the trade war with China. Stocks collapsed, the slowdown in global growth will deepen and Jay Powell will have no choice but to lower interest rates again this year. At the same time, intervention is ineffective if its not coordinated with the central bank. If the Fed sterilizes the intervention, the impact could be limited and if stocks crash, investors will flock to the safety of US dollars anyway. So while the prospect of more US protectionism, risk aversion and easing will drive USD/JPY lower, the greenback's direction against other major currencies will depend on how aggressively those central banks match the Fed's rate cuts.
Meanwhile rate cuts could also be coming for Canada after last week's employment report. The market was looking for job growth to return in July but employment fell by -24.2K, the largest drop since August 2018. Full time and part time work declined, pushing the unemployment rate up to 5.7% from 5.5%. USD/CAD shot higher immediately after the report but turned sharply lower as selling of US dollars resumed. Given the current sentiment for US dollars, it may be smarter to wait to buy USD/CAD until selling pressure eases.
Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.