Mounting political risks - Nomura

Analysts at Nomura explained that. on Tuesday, Trump escalated trade tensions by proposing a 10% tariff on $200bn Chinese imports. 

Key Quotes:

"China responded by stating that it would be forced to reciprocate the escalation. Initial market reactions were risk aversion, but moves (particularly in the G10 FX space) were limited. USD/JPY – a trade war proxy – has rebounded, testing 112.50 this week. We see risks of a relief rally in risk assets if negotiations between the US and China materialise."

"UK politics was also in the spotlight this week, with the surprise resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson. The Chequers agreement is clearly a move towards a softer Brexit, in our opinion, with room to be softened further. However, near term the market will likely continue to balance this with the prospects of a leadership challenge for Theresa May."

"We cut GBP/CAD shorts this week with much uncertainty ahead, but as soon as we have a clear signal that Theresa May can bat on without the Brexiteers holding her back GBP should start heading higher. But things may get worse before they get better." 

"At yesterday’s meeting, the BoC hiked rates, as was widely expected. Overall, the statement struck a similar tone to May’s meeting. Initial market reactions were to interpret the statement as hawkish, but these moves have since reversed. Overall market expectations appear to have been little changed. We believe the BoC remains attuned to trade and data developments, which continue to pose downside risks to the outlook."