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Trump Delays China Tariffs, How Durable is the Bottom in FX?

  • Kathy Lien
  • 14 August 2019

 

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 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 today's announcement is bad news. He may have given China a reprieve until the end of the year and bought them time to 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 their 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 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 the month of July as the year over year rate hit 1.8%, up from 1.6%. CPI is getting back towards 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 tomorrow 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 tomorrow's CPI report could fall short of expectations.

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.