Trump Delays China Tariffs, How Durable Is The Bottom In FX?

Trump Delays China Tariffs, How Durable Is The Bottom In FX?

Kathy Lien  | Aug 13, 2019 16:59

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup August 13, 2019

Currencies and equities raced higher after President Trump said he would delay tariffs on Chinese imports. He said “We’re doing this for the Christmas season. Just in case some of the tariffs would have an impact on U.S. customers.” Based on these comments, this overture is not a result of progress in US-China trade talks but instead pressure from US businesses. Regardless, investors saw this as the perfect excuse to cover their shorts. The Dow Jones Industrial Average rose more than 400 points and USD/JPY soared above 106 in response.

AUD and NZD also turned higher, leading investors to wonder if they’ve hit a bottom. Unfortunately while we expect a further recovery in risk currencies, not only is this the first time that the president acknowledged that the tariffs could harm the economy but the fact that he didn’t mention China’s action as reason for Tuesday’s announcement is bad news. He may have given China a reprieve until the end of the year and bought them time to for further negotiations but at the end of the day, Trump is caving to pressure from US businesses and not his trade partners so the tariffs could be back.

We’re also watching the protests in Hong Kong. China has been ratcheting up its response and according to Trump, they are moving troops to the HK border. The protests are having a significant affect on HK’s economy, especially with the airport shutdown but there could be global ramifications if China uses its troops to stop the protests. Trump has made the US’ hands-off position clear – he’s said that China has the capacity to resolve the situation themselves. However if we have another Tiananmen Square (NYSE:SQ) in one of Asia’s most important financial hubs, the global markets won’t be spared. Risk aversion could return, driving USD/JPY and other currencies even lower.

The dollar also received a boost from US consumer prices. US CPI rose 0.3% in July as the year-over-year rate hit 1.8%, up from 1.6%. CPI is moving back toward the Fed’s inflation target and when combined with delayed tariffs, it creates the perfect backdrop for a bigger recovery for the US dollar versus the Japanese yen, Swiss franc and euro. In fact, EUR/USD should be trading much lower after the sharp drop in the German ZEW survey. Investor sentiment hit its lowest level since 2010 with the expectations component falling to its weakest since 2011. Eurozone Q2 GDP numbers are scheduled for release Wednesday and growth is expected to slow based on the deterioration in sentiment and slowdown in spending. Meanwhile, earlier gains in sterling were short-lived. Wage growth was stronger than expected but Wednesday’s CPI report could fall short of expectations.

Kathy Lien

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