Markets are still responding to the Non-farm payrolls report and Brexit developments over the weekend, but the trade tariffs will continue to be a key factor for positioning. We consider the outlook for forex, commodities and equities markets in the coming days.
Suddenly the dollar outlook does not look to be as rosy. What has been driving recent dollar strength? A safe haven flow (perhaps surprising) during the trade dispute and potential for four FOMC rate hikes in 2018. Friday’s market reaction to the Trump administration implementing tariffs on $34bn of Chinese goods was intriguing. Previously, the safe haven yen and the US dollar have benefited from negative newsflow on tariffs. However, this seems to have been priced in and the dollar suffered a correction, exacerbated as wage growth in the payrolls report remained stubborn stuck. An escalation in the trade dispute could drive renewed safe haven positioning if the US ramps up tariffs (confirming a further $200bn of Chinese goods?) but it could also be down to how China responds. China cannot match US tariffs dollar for dollar (US imports c. $500bn from China, but China’s US imports c. $150bn). If China were to be more savvy in its response it could retain a moral high ground and also get its desired impact. The controlled economy could easily discourage/hamper/prohibit the purchase of US goods (as long as there are viable trading alternatives), and/or increase levels of red tape making business extra hard for the US companies. This would hit the US economy and subsequently the outlook for the dollar. The Fed is not especially concerned by the tariffs at present but, with escalation, it may just be in coming months. With subdued wages being less hawkish pressure too, this would be another reason to take profits on recent dollar longs.
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