Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: JPY rips higher on Trump tariffs
John J. Hardy
Chief Macro Strategist
Summary: Just as markets were recovering strongly from a slight post-FOMC hangover, US President Trump spoiled the party with the threat of new tariffs on $300 billion of Chinese imports. This escalation looks ominous and does not bode well for vulnerable risky assets. Among major currencies, the JPY could rise the most from these developments.
Trading interest
- Staying short USDJPY and adding for run to 100.00, stops above 108.00.
- Long term EURUSD calls (for example 1.1300+ calls for 3-months or longer).
Post-FOMC party ruined by new Trump tariffs
In the wake of the Wednesday FOMC meeting, risk appetite had gone full circle from trepidation to jubilation, deciding that a heel-dragging Fed wouldn’t spoil the party for now and taking US equities rushing back toward the highs for the cycle after the post-FOMC sell-off. But US President Trump suddenly spoiled the party with the announcement of 10% tariffs on what is effectively the remainder of Chinese imports, some $300 billion per year, set to go into effect on September 1.
It’s a risky move politically for Trump, as this batch of tariffs will apply more directly to massive imports of consumer goods like laptops and mobile phones. Clearly, Trump’s move is designed to apply maximum pressure to the Chinese side for the next round of talks, but this would require China to walk back its demand that all tariffs cease for any new deal to be negotiated. Hard to see how this heads into a productive direction from here and I share the markets’ surprise with this development, figuring it was more in Trump’s interest to simply play a waiting game.
The Trump tariffs completely negate the reaction to the FOMC as trade tensions preordain a September rate cut – possibly a 50 basis-point one if numbers are weak and the S&P is in deep correction mode. For now, odds have rushed close to 95% for a September Fed cut. The USD may only stay firm here against the riskiest currencies in EM, etc.
CNY back in play. The surprise announcement of new tariffs suddenly jolted the formerly quiet yuan exchange rate, with USDCNH almost touching 6.98 overnight, its highest level since late 2018. USDCNY "only" reached 6.95. If China decides that a productive relationship is no salvageable, will it use devaluation as a response to Trump’s tariffs? A CNY in motion above 7.00 in USDCNY could risk an exponential elevation of energy across all asset classes.
Chart: USDJPY
The 107.00 area in USDJPY is a locally important one and is already under strain after Trump threatened new tariffs on Chinese imports yesterday. We could quickly open for a run to 100.00 here if we continue to see US long yields lower and risk-off behavior across markets.
Tidbits ahead of the weekend
Nonfarm payrolls: beware of US 2020 census hiring effect on headline number. A Bloomberg article today reminds us that hiring for the 2020 US Census is gearing up and could mean a boost of some 50k to the July nonfarm payrolls change number release today. “Back in 2010, government payrolls surged by almost 600,000 in the year through May. By September, they fell back to around previous levels.” Conveniently, the BLS also reports a Private Payrolls survey which should garner far more attention over the next 15 months or so as observers discount the temporary census hiring.
ISM manufacturing was rather weak. The July ISM Manufacturing survey released yesterday was slightly disappoint, printing at 51.2 vs. 51.7 in June and vs. 52 expected. The New Orders component rose to 50.8 from 50.0 and Employment slumped to 51.7, the lowest level since November of 2016
Next week
Next week’s highlights include global services PMI on Monday, the RBA up on Tuesday (no cut expected, although latest US-China developments have notably shifted the odds and central bankers may be in insurance mode). The RBNZ expected to cut 25 bps on Wednesday.
The G-10 rundown
USD – US dollar reaction to risk off on Trump slapping new tariffs on China was revealing and strongly underlines our USDJPY lower thesis, helped by long US yields getting crushed. Elsewhere, we watch the EURUSD bounce for a potential reversal of the FOMC reaction.
EUR – solid bounce in EURUSD yesterday as the Trump tariffs exert their pressure on the forward Fed curve and erode USD support – a solid pull and close above 1.1100 needed to argue for a reversal, but we have an open mind.
JPY – the important 107.00 area already under pressure here as we discuss above and major levels taken out in US long yields yesterday (2.00% in the 10-year and 2.50% in the 30-year) and suggest we could drive to 100.00 quickly.
GBP – market may steer clear of sterling in a risk-off move for now. Watching 1.2000 in GBPUSD and 0.9300 in EURGBP.
CHF – trading in correlation with the JPY, but the SNB may soon have something to say as sub-1.1000 price in EURCHF raises risk of intervention.
AUD – AUD slapped lower on the Trump tariff news, as negative China news is felt Down Under first among G10 currrencies. But a firm Jul. Retail Sales print overnight provided a modest boost. Price action looks severely oversold in AUDUSD as we have touched new (non-flash crash) lows since…2009.
CAD – CAD looking solid here as the bottom dropping out of the oil market didn’t drive much collateral damage. USDCAD bears may look at establishing shorts as long as we stay south of 1.3300, figuring that Trump is going to get his weaker USD by hook or by crook.
NZD – rather neutral to the gyrations elsewhere. Chief interest is in whether AUDNZD can build a rally – overnight a solid comeback attempt after Trump’s tariff threat triggered an avalanche to new local lows. Next important risk event is NZ Q2 employment report next Tuesday and RBNZ on Wednesday (25 bps cut expected).
SEK and NOK – NOK dropped on heavy oil sell-off and the market doesn’t like the smaller currencies when risk aversion is afoot. EURNOK pushing up against big resistance line just above 9.85 which risks opening for 10.00 and EURSEK in a similar state.
Upcoming Economic Calendar Highlights (all times GMT)
- 0900 – Euro Zone Jun. Retail Sales
- 1230 – US Jul. Nonfarm Payrolls Change
- 1230 – US Jul. Average Hourly Earnings
- 1230 – US Jul. Unemployment Rate
- 1230 – Canada Jun. International Merchandise Trade
- 1230 – US Jun. Trade Balance
- 1400 – US Jun. Factory Orders
- 1400 – US Jul. Final University of Michigan Sentiment
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