FX Traders Flummoxed by Outcome of Tariff Spat Choose Inertia

(Bloomberg) — Amid the equity-market tumult kicked up by escalating trade tensions, currencies are in an unusual state of calm. The reason is that traders are struggling to choose the winners and losers.

Volatility in the $5.1-trillion-a-day foreign-exchange market has barely budged in the past two weeks, shaking off the threat of tit-for-tat tariffs between the world’s two largest economies. The stability contrasts with a jump in the Cboe Volatility Index, a gauge of price fluctuations in U.S. stocks.

For currency investors, the challenge is that measures aimed at the U.S. or China could wind up causing ripple effects across world economies. On Wednesday, for example, China’s retaliation against U.S. levies left the dollar little changed broadly, with gains versus about half of its major counterparts.

“The FX market is hedging its bets because it just doesn’t know how it’s going to play out,” said Steven Englander, head of research and strategy at Rafiki Capital. “The equity markets are putting more weight on the negative outcome.”

Here’s what other analysts say about currency-market volatility:

Russell Investments (Van Luu, interview):

• Trade tensions “escalated pretty severely” after China announced levies on U.S. imports
• “I would have expected the yen to perform a little more strongly,” he says. “If equity markets go down more, I think you would see the safe-haven function of the yen shining through”
• Sees moving to 100 this year
  • If trade tensions fuel bigger losses in stock markets, USD/JPY could fall to 95 or 90, “but that’s really a function of how quickly the equity markets go down” and is not his base case

Credit Suisse (SIX:) (Shahab Jalinoos, note):

• FX markets face little contagion from volatility in equities, and only a handful of currencies have moved by more than 1% over the past week
• “In this context, we remain content with our decision last week to close out of long-held long JPY recommendations vs the likes of USD, CAD and AUD, despite the fact that high equity volatility usually plays in the JPY’s favor”

Swissquote (Arnaud Masset, note and interview):

• USD has already been selling off, and doesn’t have much further to fall
  • “The damage is already done on the dollar in the FX market,” but in the equity market, “there is room for further downside”
• Investors are skeptical that tariffs will go into force, and if they do, the pricing pressure could encourage the Fed to raise rates, he says
  • “Investors believe there is substantial hot air in the war of words”

Credit Agricole (PA:) (Jennifer Hau, note and interview):

• FX market reaction following most recent tariff threats suggests “a lot of risk premium is already priced in”
• Tension and threat of trade war may boost volatility for the and New Zealand dollar

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