Trump shocks markets with tweet about raising tariffs on China this Friday

Summary

• USDCAD: Dollar/CAD has gapped higher to start the week as the broader USD reacts to President Trump’s surprisingly negative tweets on Sunday about the status of US/China trade talks.  Apparently, after weeks of talks going well, according to Trump and senior US officials, Trump now said that the talks are proceeding “too slowly” and they he would raise tariffs on $200bln of Chinese goods from 10% to 25% this Friday.  Speculation then started to spread in Asian trade overnight that China would cancel this week’s scheduled trade talks with the US, and with that Asian markets became a sea of red with the Shanghai Composite crashing 5.6% and the Chinese yuan collapsing lower.  We also saw broad demand for the traditional safe havens (USD, JPY and bonds), which helped USDCAD gallop back higher towards Friday’s post NFP highs.  Some sense of calm has returned in European trading so far today though as the Chinese foreign ministry said a delegation was still planning to go to United States this week, but rumor has it that it will now only be a low level delegation without Chinese Vice Premier Liu He.  USDCAD is now trading off its daily highs but it still has a bid tone and it is now well back above the 1.3430-40 level it lost on Friday.  Today’s calendar will feature some Fed speak from Harker and Williams around 9:30-10amET, and a speech from the Bank of Canada’s Stephen Poloz before the Winnipeg Chamber of Commerce at 2pmET, but we think traders will be focused on the broader risk tone to markets today.  Many markets have Sunday opening gaps this morning (AUDUSD, USDCAD, USDJPY, S&P futures) and so we think there’s a risk USDCAD turns lower at some point to fill its own gap.  The leveraged funds trimmed both long and short positions in USDCAD during the week ending April 30, but still remain net long the market.  This week’s economic calendar will feature the Canadian Employment Report for April on Friday.

   

  Today: Bank of Canada’s Stephen Poloz speaks at 2pmET

  Tuesday: Fed’s Quarles speaks

  Wednesday: Canadian Housing Starts (April), Fed’s Brainard speaks

  Thursday: US PPI (April), Canadian and US Trade Balances (March), Fed’s Bostic and Evans speak

  Friday: US CPI (April), Canadian Building Permits (March), Canadian Employment Report (April) 

• EURUSD: Euro/dollar is amazingly avoiding the risk-off tone to the broader markets this morning and we think this might be because of the upbeat April Markit Services PMI announced for Germany earlier today, along with the better than expected Eurozone Retail Sales print that came out for March.  We also think some hefty option expiries are playing a part in keeping the market directionless here, as over 1.1blnEUR rolls off between the 1.1185 and 1.1200 strikes this morning at 10amET.  The funds added to both long and short positions in EURUSD during the week ending April 30, leaving their net short position more or less unchanged week over week.  The European economic calendar this week features some German and Italian data:

   

  Tuesday: German Factory Orders (March)

  Wednesday: German Industrial Production (March)

  Friday: Italian Industrial Output (April), Italian Retail Sales (March)

• GBPUSD: Sterling seems to be trading in its own world on this holiday Monday in the UK as traders dial back Friday’s explosive move to the upside.  We don’t think Friday’s move had anything to do with Brexit optimism; instead we feel it was NFP initiated and then technically driven when stop orders triggered in GBPUSD above 1.3070 and EURGBP below 0.8560.  There was also very little in the way of chart resistance for GBPUSD until the 1.3170s, where funny enough we eventually topped out.  The market is now testing support (formally resistance) at the 1.3070-80s as NY trading gets underway.  The funds liquidated some long positions during the week ending April 30, which now extends their small net short GBPUSD position a little bit.  This week’s UK economic calendar features a barrage of data on Friday:

   

  Tuesday: Bank of England’s Cunliffe and Haldene speak

  Friday: UK preliminary GDP (Q1 and March), Industrial & Manufacturing Production (March), Trade Balance (March)

• AUDUSD: The Aussie gapped lower along with the Chinese yuan and copper prices when markets reacted to Trump’s tweets on the Sunday open.  Chart support in the 0.6980s gave way in Asian trade, but traders have since been fighting to regain it.  The funds added sizably to their net short AUDUSD position during the week ending April 30, and this net position now stands a new 18-week high.  The Reserve Bank of Australia (RBA) will be meeting at 12:30amET tonight to announce their latest decision on interest rates.  Many are considering this meeting to be a “live” one with regard to the possibilities of a rate cut.  OIS swaps are currently pricing in a 40% chance the RBA cuts 25bps.  We think AUDUSD is at risk of a short covering rally (which will likely fill its Sunday opening gap in the 0.7010s) should the RBA keep rates unchanged tonight.

• USDJPY: Dollar/yen gapped lower along with the S&P futures at the start of trading last night.  We’ve since seen traders buy the dip at chart support in the 110.30s, and they’re now trying to fill the Sunday opening gap itself, which lies in the 110.80-111.10 zone.  The funds extended their net long USDJPY position during the week ending April 30 as it appears recent shorts from early April took profits.  With the S&P futures having found some support here at the 2886 level, and with a large chart gap still remaining unfilled between 2917 and 2950, we think traders need to be on guard for the possibility that US/China trade talk anxiety calms down over the next 48hrs.  Japanese markets will reopen tomorrow after the week long Golden Week holidays.  This week’s Japanese calendar features Japan’s Markit Manufacturing PMI for April tonight, and the Markit Services PMI for April/BOJ Minutes tomorrow night.

Tune in @EBCTradeDesk for more real-time market coverage.

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About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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