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Market Analysis

USDJPY Inches Up On Hopes Of Avoiding A Potential Trade War

June 01, 2018
BY Emma Richards

USDJPY was trading around 107.00 in the EU session on Monday, inching up by almost 0.06% following a mixed tone from Trump and hopes of maturity from China’s President Xi to avert a serious trade war amid an ongoing war of words.

Earlier USDJPY made a high of 107.20 off a softer tweet from Trump on Sunday but later lost the momentum on another harsh tweet on early Monday U.S. time. USDJPY reached a low of 106.84 on Monday, in the early Asian session.

USDJPY is now a victim of Trump’s Twitter tantrum:

On Sunday, Trump tweeted in an apparent conciliatory tone: “President Xi and I will always be friends, no matter what happens with our dispute on trade. China will take down its trade barriers because it is the right thing to do. Taxes will become reciprocal & a deal will be made on intellectual property. Great future for both countries!”

But on Monday, Trump’s tone had changed: “When a car is sent to the United States from China, there is a tariff to be paid of 2 1/2%. When a car is sent to China from the United States, there is a tariff to be paid of 25%. Does that sound like the free or fair trade?  No, it sounds like STUPID TRADE – going on for years!”

Thus, although Trump referred Xi as an “eternal friend” irrespective of the trade spat and its outcome, Trump expects that China will eventually budge and remove its so-called trade barriers and will also make a deal on IP and reciprocal taxes.

On Sunday, Trump apparently softened his hard stance on China as Beijing ramps up the rhetoric in a show of toughness over trade spat. Trump said China ‘will take down’ trade barriers as Beijing’s mouthpieces accused Washington of abusing national security reviews and warn that Beijing has plenty of ammunition for a fight.

Trump sent a friendly message to China on Sunday as Chinese state media ramped up their rhetoric in the trade dispute with the US, recalling China’s Korean War mettle and warning Washington that it was becoming the enemy of a multipolar world.

But Trump also predicted China will be first to buckle as the world’s largest economies teeter on the brink of a trade war. “China will take down its trade barriers because it is the right thing to do,” The comments follow a week of rising tensions on trade, punctuated by Trump’s surprise order late on Thursday that the US identify additional Chinese goods to target and Beijing’s immediate vow that it won’t back down.

Meanwhile, top members of Trump’s economic team defended the US actions on tariffs. Kudlow, Trump’s top economic adviser, said it will generate “very positive results and we’re not going to end up in a trade war”. But Kudlow also said he would support tariffs if negotiations fail.

Elsewhere, Treasury Secretary Mnuchin said the U.S. objective “is to continue to have discussions with China,” while White House adviser Navarro said the threat of tariffs is not merely a bargaining chip. The end result remains to be seen as, in China, Trump faces a rising superpower with the economic might to hold its own.

Apart from Trump’s mood, all the focus will be also on Xi’s stance and speech on Tuesday at China’s Boao forum, which is China’s answer to Davos. The market may be quite confident that considering China’s President Xi’s maturity, he may not choose to ramp up the China rhetoric in such public forum and instead will try to tone down it and de-escalate the rhetoric.

As a reminder, China rarely inflames such sensitive issues in public but, at the same time, the ongoing Trump tariff tantrum may be an opportunity for Xi to consolidate support not only in China but also in other parts of the world, especially in the EU, taking advantage of the anti-American (Trump) sentiment.

As China weighs its next move in the continuing trade spat with the U.S., there is report that the country is looking at the potential impact of a gradual depreciation of the Yuan. One piece of analysis said to have been prepared for senior officials looks at the effect of using the currency as a tool in trade negotiations with the Trump administration.

Among the factors likely to influence any decision on the matter is the risk of the U.S. Treasury Department labeling the country a “currency manipulator” in its semiannual currency report due later this month.

Technical View: (Positional)

Technically, whatever may be the Trump narrative, USDJPY now has to sustain over 107.55 for a further rally to 107.75-108.30-108.55 and 109.05/109.60-110.50; otherwise sustaining below 107.35 it may again fall to 106.50-105.90 and 105.50-104.95 and further 104.55-104.20 in the coming days.



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