Behind The Post-China Tariff Reversal In FX And Equities

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It could have been a very ugly day for the financial markets with falling more than 500 points before the open but by the end of the NY session, equities recovered all of their losses and turned positive for the day, resulting in the same reversal in major currencies. The big story was the new series of tariffs from China, worth around $50 billion. This is more aggressive and punitive than China’s $3B-warning shot fired in March. Yet investors took the news in stride because the biggest question Wednesday morning was not how much damage the tariffs will do but whether they will take effect at all.

Rather than add fuel to the fire, President Trump took to twitter Wednesday to say the U.S. and China are not in a trade war. This suggests that recent measures by the U.S., which forced China’s hand Tuesday night is yet another move by the president to pressure China to the negotiating table. China said its levies will be implemented when the U.S. starts its tariffs, so the world’s 2 largest economies could be in a stare down for a while until one side officially takes action. President Trump has a history of making splashy threats only to walk back from them in the days/weeks that follow. Based on Wednesday’s price action, investors are clearly hoping that the tariffs will be watered down or not implemented at all. Considering that the U.S. plans to hold a public hearing for businesses next month, between now and then China and the U.S. could move into a calmer period of negotiation rather than retaliation, which would be positive for risk appetite and stocks.

Looking ahead, Friday’s U.S. report is still a big focus. did not fall as much as expected in March and more importantly, while eased, the of the report increased. This, combined with low , suggests an upside risk for this week’s jobs report.

The may have to wait until the U.S. to break out of its tight consolidation against the U.S. dollar. For the past 5 trading days, the pair remained confined in a 90-pip range. Wednesday morning’s stronger-than-expected for March lent support to the currency but failed to take it above Tuesday’s high. A breakout is imminent and the direction of the move will hinge on the market’s appetite for risk and the . We have Germany’s report, revisions to Eurozone PMIs, Eurozone and scheduled for release on Thursday. The impact of these reports should be limited.

will be on the move with U.K. composite and PMI numbers schedule for release on Thursday. So far we know that remained stable but contracted in March. Higher highs and higher lows over the past 4 trading days suggest that GBP/USD wants to rally but strong data will be needed to drive the currency pair upwards. The Bank of England is widely expected to be the next major central bank to raise but investors are looking for data to validate their hawkishness before buying the currency.

All 3 of the commodity currencies traded higher Wednesday with the leading the gains. The currency was supported by the Treasury’s comment that consumption should continue to support growth but its rally really gained momentum when U.S. stocks started to climb off their lows. In Australia, a sharp rise in was offset by lower . While Australia will be hit hard by a slowdown in China, if the tariffs never come to fruition, the recent consolidation in above .7650 could become a bottom. With that in mind, more Australian data was due for release Wednesday evening in the form of and the . extended its losses as bounced around its lows. According to President Trump’s economic advisor Larry Kudlow, a positive NAFTA announcement is imminent and “the stock market’s going to love it.” This can only mean one thing, which is that Canada and the U.S. are close to a deal.