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Don't breathe too big a sigh of relief
John J. Hardy
Global Head of Macro Strategy
Résumé: The massive comeback in risk sentiment and risky currencies only resets the market after an episode of sheer panic. Huge long-term implications remain from the tariffs still in place, particularly the fact that US and China are in a trade war.
Trump’s 90-day tariff pause on all reciprocal tariffs ex-China sparked a risk appetite comeback of epic proportions across markets yesterday. The US equity market rallied the most since late October of 2008. As with the market’s behavior then and in subsequent market meltdowns, the size of the rally was in approximate proportion to the size of the prior sell-off. In currency-land, the comeback saw safe havens JPY and CHF crushed and pro-cyclical “G10 smalls” (AUD, CAD, NZD, NOK and SEK) resurgent. Market volatility is likely to remain high after yesterday’s move, but I suspect we have seen a climax in volatility that won’t be repeated. More importantly is assessing whether this marks a sustained change of direction for some of the trends leading into this event. There are more questions than answer in most corners of this market due to the volatility of the policy signals coming out of the Trump administration, something that is likely to continue. More on that below but first let’s have a look at how the critical USDJPY exchange rate has behaved in recent days and then I’ll take a stab at how things may develop, or at least what to watch for in the coming days.
Chart: USDJPY weekly
USDJPY has gyrated frantically in recent sessions, as traders couldn’t decide what to do with Trump’s new tariff plan and the fallout across markets. The US treasury market has nearly always been a critical coincident indicator for trading the Japanese yen, with steep drops in long US treasury yields usually associated with JPY strength (due to a shrinking US yield advantage) and surges in US long treasury yields associated with JPY weakness (rising US yields feeds carry trading). Over the last few sessions, however, we have seen some dramatic divergences from traditional correlations as US long treasury yields surged violently higher off recent lows. This massive treasury selling suggested systemic instability in the US treasury market – something that is intolerable for markets and usually can’t sustain for more than a few days. At first, as US treasury yields rose from last Friday’s lows, USDJPY rose as well, but the further spike interestingly also saw the JPY rallying at times – most dramatically yesterday just before Trump announced the pause on the reciprocal tariffs. This seemed a sign that global investors were finding non-USD currencies as a safer harbor than the US. Had last week’s treasury market volatility continued, the Fed would likely have stepped into calm things, driving a USD sell-off across the board. For now, there is little technically to go on in the USDJPY chart, but as we discuss below and have discussed for weeks, there is likely a strong incentive for Japan to strengthen its currency significantly from here – if USDJPY settles to a new low close here as volatility eases we will continue to set sights on a test of the huge 140.00 area and beyond eventually.
Looking ahead – themes to watch. Has JPY strength been pre-announced? As noted above, yesterday saw an epic rally in JPY crosses on the sudden lifting of the Trump reciprocal tariffs, which lifted short US yields as the market lowered the odds of panic Fed rate cuts. The JPY’s comeback since yesterday has been impressive and could be set to continue, although we may need for the market to more clearly begin pricing weaker US growth and for US longer yields to continue settling lower. Also watch for signals to emerge from Japan during or after coming US-Japan trade talks that have been sparked by Trump’s tariffs. Watch for any wording from US Secretary of Treasury Bessent as well. A Nikkei headline, I assume based on unnamed sources, suggested a few days ago that JPY will be on the agenda in those talks, a natural angle given its still very weak levels. A side note: I can’t help but infer from yesterday’s very strong foreign bidding in the US 10-year treasury auction that “communications” are being made to “encourage” bidding on US treasuries as a sign of good-will – is this part of the game as well and should we expect today’s US 30-year T-bond auction to shoot the lights out? More EURUSD upside? We like the prospects longer term for EURUSD upside on the outlook for higher odds of relative US economic weakness on the fiscal drag in the US and disruptions from tariffs. Europe and the euro, meanwhile, is set to enjoy a significant German fiscal expansion in coming years. The chief concern is the near term, especially if the EU plays the Trump administration the “wrong” way on trade and we end up in a retaliatory cycle. We’ll stay nervously constructive on EURUSD upside for now as long as the daily closes remain above 1.0900. Will China go for further devaluation? We saw an episode this week in which the PBOC set the CNY fix at its weakest level and allowed the USDCNY and USDCNH exchange rates to drift through the thrice-defended 7.375 level on Tuesday, seemingly signaling a willingness to devalue the currency versus the US dollar. Since then, the USDCNH rate has dropped back into the prior range (7.360 as of this writing), if not convincingly. What is China’s aim here? A US-China trade war is still in place and is massively deflationary and China will likely roll out massive monetary easing and fiscal stimulus, which have offsetting FX impacts. This may mean a weak CNH in broader terms and USDCNH could drift higher to 7.50 and beyond this year, but China may look to avoid any devaluation drama to maintain a sense of stability and control, with that aim supported by a weak US dollar as well (i.e., CNHJPY may offer far more volatility if our thesis of a strong JPY is correct). What next for the pro-cyclical currencies? Here I have the least visibility. As long as a US-China trade war is raging, it is difficult to work up enthusiasm for risk sentiment or for the global growth outlook. Perhaps some further improvement is possible if volatility continues to recede, but a more sustained rally in pro-cyclical currencies would need for the growth outlook to pick up, which eventually it might on the other side of trade disruptions as China stimulates its domestic economy and the Eurozone does likewise with new investments in infrastructure and defense, led by Germany. But is this more of a 2026 story than one that will engage any time this year? Unsure. FX Board of G10 and CNH trend evolution and strength.
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White hot volatility almost across the board now after Trump’s Liberation Day last week. Note the pronounced CNH weakness and AUD following the negative direction there, while the euro and Swiss franc stand out on the strong side, although I would expect the JPY to emerge as the strongest currency again soon. NOK has snapped necks with its deceleration from strength to weakness on the plunge in crude prices and the broader risk-off trauma of the last week.
Table: NEW FX Board Trend Scoreboard for individual pairs.
Some wild volatility of late, particularly in safe havens JPY and CHF and G10 smalls like AUD and NOK. Some AUD crosses have seen their most volatile sessions in 1,000 trading sessions yesterday. Let’s see if two-way volatility settles a bit here and we establish more directional, trending behavior.
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