FX Update: Markets on edge over course of US-China relationship

The euro strength on the back of the EU’s intent to pursue an expanded budget funded in part by vastly expanded EU direct debt issuance was the strong theme yesterday and into this morning, with EURUSD managing a move above 1.1100. While the euro may remain firm in the crosses on this story (note EURGBP slipping above 0.9000 this morning), the focus within the G3 (USD, JPY, EUR) could shift depending on what US President Trump plans to say to the world at today’s press conference on new measures against China. His announcement late yesterday intending to do so sparked a dip in risk sentiment that has carried through to this morning.

While, as we discussed on this morning’s Saxo Market Call podcast, Trump is unlikely to announce an end to the US’ special relationship with Hong Kong as this would bring enormous collateral damage across markets and harm many large US companies and is too dramatic a step at this time (even if Secretary of State Pompeo saying that Hong Kong is no longer autonomous suggests there is no basis for the US to maintain special terms for Hong Kong in the longer run.) More likely and least damaging would be an announcement of sanctions against key mainland Chinese individuals and entities the US deems responsible for policies it disapproves of. Somewhere in between would be any move on trade policy that endangers the status of the US-China trade deal agreed back in January. As for USDCNY and USDCNH, the USD weakness of late has eased focus there, but could obviously pick up at any time. Also note that this recent EUR strength has taken EURCNY to within a percent of the 8.00 area that has provided resistance (or been targeted…) multiple times since 2017.

US Fed Chair Powell is out speaking later.

Chart: NZDJPY
Not exactly a market focal point at the moment, but NZDJPY (and AUDJPY, CADJPY, etc..) could experience a sudden shift in focus in coming sessions if whatever US President Trump has planned to announce on China (or any other trigger) changes the “market melt-up” narrative that has dominated the action over the last couple of weeks. In general, it is tough to argue for a strong ramping higher from these levels in a pair like NZDJPY, as the RBNZ is headed down the path toward negative policy rates and is doing massive QE. There is not much carry left in this former carry trader darling and little reason for foreign investors to buy NZ government bonds for their yield – as the yield curve well below 100 basis points out to 10 years.