China announces retaliatory tariffs on the US. Over to you now Jerome Powell.

SUMMARY

ANALYSIS

USDCAD

Canada just reported its Retail Sales report for the month of June and the numbers beat expectations (0.0% MoM vs -0.3% on the headline, and +0.9% vs 0.0% Ex autos).  This marks 3 out of 4 better than expected Canadian economic headlines for this week, and saw USDCAD spike lower initially, but the market is now competing against “risk-off” flows that kicked in a half hour ago when China announced it will levy retaliatory tariffs of another $75bln on US goods, starting September 1st.  This could make Jerome Powell’s speech at Jackson Hole at 10amET a whole lot more interesting if he chooses to acknowledge this morning’s headlines, but we still think there’s a fair chance that the Fed chairman disappoints markets again.  Should he do that, we think we could finally see USDCAD break out higher above the 1.3340s.  The global bond and money markets may be rightly worried about growing risks to offshore USD liquidity and a global recession that could ensue because of it, but it appears (from the last FOMC meeting) that the Fed wants to make these market participants fight for it.

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EURUSD

Euro/dollar is leaking lower this morning after traders failed to produce a NY close above down-ward sloping trendline resistance in the 1.1090s.  Global Times editor-in-chief Hu Xijin, now largely considered a mouthpiece for the Chinese government, gave markets his take on the latest state of the US/China trade war earlier today over Twitter: "Based on what I know, China will take further countermeasures in response to US tariffs on $300 billion Chinese goods. Beijing will soon unveil a plan of imposing retaliatory tariffs on certain US products. China has ammunition to fight back. The US side will feel the pain."  Turns out he was right, especially on the timing!  This morning’s retaliatory China tariff headlines is throwing a bit of a wrench into pre-Jackson Hole trader positioning, but it appears to be affecting commodity currencies more so (as usual), as opposed to EURUSD.  The leveraged fund community remains net short EURUSD heading into this event, and we would argue that they continue to have negative chart technicals on their side.  We think the market could potentially fall apart here if Jerome Powell disappoints the bond markets yet again.  The Fed’s Bullard said that lowering rates would help the FOMC hit its inflation target, when speaking to CNBC this morning.  This not is surprising commentary from Bullard, who’s arguably been one of the most dovish members of the committee lately.  This headline is now seeing EURUSD bounce a little bit.

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GBPUSD

Sterling is moving moderately lower this morning too, but from much higher levels after Germany’s Angela Merkel gave the market a dose of Brexit hopium yesterday.  The Bullard headlines that have just crossed is now giving GBPUSD a boost as well.  Since yesterday’s strong breakout above the 1.2170s held into the NY close, we think there’s "technical" scope for further GBPUSD gains here, but the market might struggle if Powell disappoints the rate cutting doves this morning.

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AUDUSD

The Aussie traded down with EURUSD in overnight trade, but is now taking another swoosh lower following breaking news that China will levy retaliatory tariffs of another $75bln on US goods, starting September 1st.  The joke making the rounds now is that Powell is scrambling to re-write his speech for 10amET.  The leveraged funds remain short AUDUSD heading into Jackson Hole and we think there’s scope for the market to re-test the low 0.67s should Powell disappoint.

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USDJPY

The retaliatory tariff headlines from China is understandably causing some “risk-off” flows to emerge here in what should have been some quiet, pre-Jackson Hole, trading.  Well played China.  Well played.  The S&Ps, crude oil, and bond yields have moved swiftly lower while gold prices have jumped higher.  Dollar/yen has given up yet another attempt to run higher to the 107s after the market moved back above the 106.50s in Asian trade overnight.  Over to you now Jerome Powell.

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Charts: TWS Workspace

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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