USD/JPY: Trade war themes hitting global equities

• USD/JPY has been caught in the crossfire of a spat between US and China.
• Prolonged trade wars are a likely byproduct of COVID-19.

USD/JPY is trading at 106.81 between a range of 106.66 and 107.06 in a slightly risk-off start to the week following the news of an investigation into China's handling of COVID-19.

Equities under trade-war pressures

The weekend news sparked up a risk-off session in Asia which has carried on into European and US markets on Monday as the US administration investigates into the origin of the virus. While equity markets in Japan and China were closed today, Hong Kong’s Hang Seng closed down 4.2%, India’s Sensex fell 5,.9%, and South Korea’s Kospi lost 2.7%.  

European equities were down across the board by midday. US equity futures pointed to a down market open and the S&P 500 is struggling to stay above water, -0.4% a the time of writing. China’s Shanghai Composite will remain closed through Tuesday, while Japan’s Nikkei will be closed through Wednesday. 

The US is seeking to prove that China withheld information which ultimately led to the global pandemic, in their view, albeit with it being unsubstantiated at this point in time. The WHO has confirmed it has not received evidence from Washington about its speculation about Wuhan laboratory.

In response to Mike Pompeo, Secretary of State, interview and accusations on ABC News reported on here: What you need to know as markets open: Pompeo and Trump ratcheted up US and China tensions, the Global Times (GT) wrote an editorial here: Pompeo's anti-China bluff strategy reveals all-or-nothing mentality to fool US voters – GT.

An environment for strong USD

Nevertheless, rising tensions between the U.S. and China officials over the origin of the coronavirus is fueling fears of a new trade war. What we have here is the making for a prolonged season of risk-off with the Chinese and US spat firmly back on the agenda. This could make for a stronger US dollar environment if the trade wars have been anything to go from with the DXY rising from the 88 handle. The dollar rallied when US President Donald Trump in 2018 began setting tariffs and other trade barriers on China with the goal of forcing it to make changes to what the US says were "unfair trade practices".

If we cast eyes over the 2018 USD/JPY chart, it was a year where the pair rallied from a low of the 104 handle to the 114 handle. However, the yen took over the role of the safe haven in 2019 with a myriad of global risks that had been developing. The yen is favoured as a surplus nation currency so it tends to withstand prolonged bouts of USD dollar strength compared to other currencies, such as GBP.  if there is another stock market crash, the yen would be expected to benefit from risk-off flows. 

USD/JPY levels