Trade war headlines overnight rocked the FX market temporarily - AUD, NZD, CAD and NOK rose temporarily between 0.6-1% vis-à-vis JPY.
While it does not represent real progress in trade talks, we believe the reaction in FX markets provides a blueprint for how markets will trade once a deal is struck.
We continue to look for a trade deal on 3-6M, which should give rise to an appreciation in AUD, NZD, CAD and NOK vis-à-vis JPY.
On 17 January 2019, at around 20:40 CET, an unconfirmed news report surfaced that the US was considering lifting tariffs on China. Apparently, US Treasury Secretary Steve Mnuchin had proposed the move in an attempt to calm markets, but faced resistance from US Trade Representative Robert Lighthizer. The story proved short-lived as Mnuchin denied it about half an hour later. Even though it seems unlikely from the back-and-forth headlines whether progress towards a trade deal has been made, the response in FX markets may provide a blueprint as to how it will react once a trade deal is struck, which we expect to happen over the coming months.
As Chart 1 shows, around the time the headline broke, commodity-exporting currencies, i.e. AUD, NZD, CAD and NOK rose sharply vis-à-vis JPY. In particular, AUD and NZD gained, rising close to 1%. CAD and NOK rose about 0.6-0.7% versus JPY. When the story was denied, some of the moves were retraced. The response fits well with how we viewed the ripple effects of the trade war (and thus also a reversal) in FX Strategy FX ripple effects of global trade war , 16 July 2018. AUD, NZD, CAD and NOK were ranked in the top half, while JPY ranked at the bottom in terms of sensitivity to the trade war.
Overall, we continue to look for a trade deal within three to six months (see China Weekly Letter Big jump in CNY on trade optimism and weaker USD for our latest take on trade talks). The next important date to keep an eye out for could be 30-31 January, when vice President Liu He, is likely to meet with US Trade Representative Robert Lighthizer. If momentum continues to build, we should expect commodity currencies to gain further vis-à-vis JPY. We forecast AUD, NZD, CAD and NOK will appreciate vis-à-vis JPY on 6M.
