What Could Scuttle the USDJPY Rally?

Market Drivers October 3, 2018
USDJPY stalls at 114.50
VP Pence speech against China weighs
Nikkei -0.41% Dax -0.56%
Oil $76/bbl
Gold $1199/oz.
Bitcoin $6600
Europe and Asia:
AUD Trade 1.6B vs. 1.3B

North America
USD Weekly jobless claims 8:30
CAD Ivey PMI 10:00

FX markets consolidated after a massive dollar rally yesterday with most of the majors seeing minor 20 pip bounces amidst little news flow ahead of Friday’s NFPs.

The latest spate of economic data has provided the greenback with an unambiguous boost as yields on the 10 year have spiked to 3.21% now trading firmly above the 3.00% level. The buck was further bid in early Asian session trade after uber hawkish rhetoric from FOMC Chief Jerome Powell who stated that the Fed may need to tighten above its neutral rate target in order to get ahead of inflationary forces that are building.

This Friday’s NFP will be a key test of true inflationary pressures as all eyes will be on the average wage growth component of the report. With Amazon’s move to raise its minimum wage to $15/hour the much-awaited rise in wages may finally be starting in the US economy. If that’s the case, it should prove positive for growth and for inflation and keep the dollar bid as US rates climb higher.

However, some of the enthusiasm of dollar bulls could be tempered today by rising geopolitical tensions. VP Pence is expected to make a speech today at the Hudson Institute that will be sharply critical of China. The Trump administration appears to be escalating its war on China on both economic and political fronts, with VP Pence making a case that China is a far bigger geopolitical danger to US than is Russia. This “China is the new Russia” meme comes on the heels of a story in Bloomberg that suggests China may have been able to insert a tiny microchip on circuit boards of many US technology leaders including AWS and Apple, but even more troubling on board of US Navy ships, giving it access to top-secret US networks.

If US begins to assert a much more aggressive stance against China, the rising political and economic tensions could cast a pall over global markets very quickly and the rosy US growth picture could evaporate in an instant as both costs and end-user markets for US multinationals come under severe pressure.

So far traders have ignored the rising geopolitical risks but if Mr. Trump decides to escalate the tensions by commenting on VP Pence’s speech the pair could drift back below 114.00 as risk-off flows push aside positive economic news.