USDJPY – An Early Warning for the Markets?

Market Drivers March 06, 2018
USDJPY back below 106.00
RBA remains on hold
Nikkei 1.79% Dax 1.23%
Oil $63/bbl
Gold $1322/oz.
Bitcoin $11200

Europe and Asia:
AUD Retail Sales 0.1% vs. 0.4%
AUD AU RBA on hold 1.5%

North America
USD Factory Orders 10:00

Despite very supportive equity market flows and a relatively steady yields, USDJPY could not hold its session highs today and gave back much of its overnight rally falling below the 106.00 figure by morning London dealing. Although both Nikkei and Dax were up more than 1% each, risk flows provided little support for the pair as concerns over a trade war continued to reverberate in the market.

Today the European Commission weighed in on the matter, suggesting that it would consider retaliatory action should Trump Administration proceed with its plans to enact tariffs on steel and aluminum products.

It’s hard to ascertain just how serious Mr. Trump is in his actions, with many market players hoping that this was simply a negotiating tactic to win better terms for the NAFTA accord. For now, any action appears to be delayed at least for a few days as his aides scramble to set up meetings with various industry officials to dissuade Mr. Trump from enacting the tariffs. There were reports that White House advisor Gary Cohn was convening a meeting of auto industry executives to convince Mr. Trump of the folly of his decision, but as always with Mr. Trump policy is based on feeling rather than fact, so no one in the market is certain of the outcome and that uncertainty is most clearly expressed in USDJPY today which remained near session lows in morning London trade.

Elsewhere, the calendar in North America is barren, so any trade flows are likely to be headline driven with FX remaining in relatively tight ranges unless the news provides further clarity on the tariff issue one way or the other.

As many analysts have noted, the economic impact of tariffs is rather limited (though more significant than most market players imagine, as multiplier effects could have significant cost increases on final goods), but it is the political precedent that it sets that could be far more damaging to the global economy as a whole. Just as the economy in OECD is showing signs of sustainable growth for the first time in the decade, the cycle of trade tariffs, responses and recriminations could cast a pall on global trade as a whole. With sentiment already dented by the rise of populism in Western democracies, a unilateral tariff that sparks an economic war would reverberate throughout the markets and USDJPY weakness is simply an early warning sign for the markets.