Yen Jumps on Trade War Escalation, Yuan Tumbles

Yen surges broadly as Asian markets tumble sharply on US-China trade war escalation. Gold also resumed recent up trend and hit as high as 1555. But traders turn a bit more cautious as mixed messages came out of China. A bit more time is needed to gauge the formal response on the escalation. At the time of writing, Euro and Dollar follow Yen as the next strongest. Australian and New Zealand Dollars are the weakest naturally, on risk aversion.

Technically, USD/JPY resumes recent decline by breaking 105.04 support. Next target is 103.69 projection level. EUR/JPY is on track to next medium term support at 114.85. 0.6677 low in AUD/USD will be a focus today and break will resume larger down trend. With today’s rebound and breach of 1.6594 in EUR/AUD, recent correction is likely completed. Further rise should be seen in EUR/AUD to 1.6786 resistance and break will resume recent up trend.

In Asia, currently, Nikkei is down -2.08%. Hong Kong HSI is down -2.79%. China Shanghai SSE is down -0.95%. Singapore Strait Times is down -1.41%. Japan 10-year JGB yield is down -0.0398 at -0.275.

China: Trade war with US is an unavoidable trial by fire

Chinese Vice Premier Liu He tried to tone down recent abrupt escalation of trade tensions with the US. He said “we are willing to resolve the issue through consultations and cooperation in a calm attitude and resolutely oppose the escalation of the trade war.” He added that such escalation is “not beneficial for China, the United States, nor to the interests of the people of the world”.

Liu also emphasized that China “welcome enterprises from all over the world, including the United States, to invest and operate in China”. “We will continue to create a good investment environment, protect intellectual property rights, promote the development of smart intelligent industries with our market open, resolutely oppose technological blockades and protectionism, and strive to protect the completeness of the supply chain,” he added.

However, state media are singing another tune. The official China Daily warned that US President Donald Trump’s tariff war was unquestionably “politically motivated”. And, “what Washington wants from its largest trade partner is for it to be content to play second fiddle and meekly do as it demands”. It added “Beijing regards the trade war as an unavoidable trial by fire, from which the country will emerge stronger.”

Yuan tumbles in response to trade war escalation

In response to trade war escalation, Chinese Yuan and stocks tumble sharply at open today. USD/CNH (offshore Yuan) hit new high at 7.1832 before retreating mildly. USD/CNH’s up trend from 6.2359 is in progress. As long as 6.9909 support holds, further rise should be seen to 100% projection of 6.2359 to 6.9804 from 6.6704 at 7.4149 in medium term next.

US and Japan agreed in principle on trade deal, for signing next month

US President Donald Trump and Japan Prime Minister Shinzo Abe announced to have agreed in principle on trade deal, at a joint press conference at G7 in France. The teams are now working on finalizing the agreement for signing next month.

Trump said “It’s a very big transaction, and we’ve agreed in principle. It’s billions and billions of dollars. Tremendous for the farmers”. US Trade representative Robert Lighthizer said the agreement “will lead to substantial reductions in tariffs and non-tariff barriers across the board.”

Abe also noted “we still have some remaining work that has to be done at the working level, namely finalizing the wording of the trade agreement and also finalizing the content of the agreement itself… But we would like to make sure that our teams … accelerate the remaining work for us to achieve this goal of realizing the signing of the agreement on the margins of the U.N. General Assembly at the end of September.”

Looking ahead

The week ahead is relatively light on data. Main focuses will be on US-China trade war, Italian political turmoil and any news regarding Brexit. On data, US durable goods and PCE inflation will catch most attention. German Ifo and Eurozone CPI flash could seal the case for ECB easing next month. Canada GDP will catch some attention too, together with housing data from Australia and confidence data in New Zealand.

Here are some highlights for the week:

• Monday: New Zealand trade balance; German Ifo business climate; US durable goods orders.
• Tuesday: Japan SPPI; Germany GDP final; UK BBA mortgage approvals; US house price index, consumer confidence.
• Wednesday: Australia construction work done; Germany Gfk consumer sentiment, import prices; Eurozone M3.
• Thursday: New Zealand ANZ business confidence; Australia private capital expenditure; Japan consumer confidence; Germany CPI flash, unemployment; US GDP revision, goods trade balance, wholesale inventories, jobless claims, pending home sales.
• Friday: Japan Tokyo CPI, unemployment rate, retail sales, industrial production, housing starts; Australia building approvals; Germany retail sales; Swiss KOF economic barometer; UK M4 money supply; Eurozone CPI flash, unemployment rate; Canada GDP; US personal income and spending, Chicago PMI.

USD/JPY Daily Outlook

Daily Pivots: (S1) 104.88; (P) 105.80; (R1) 106.35; More…

USD/JPY drops to as low as 104.45 so far today and break of 105.04 support indicates down trend resumption. Intraday bias is back on the downside for 100% projection of 112.40 to 106.78 from 109.31 at 103.69 next. In any case, break of 106.73 resistance is needed to confirm short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, decline from 118.65 (Dec 2016) is still in progress and the pair is staying well inside long term falling channel. Firm break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51. For now, we’d expect strong support above 98.97 (2016 low) to contain downside to bring rebound. In any case, break of 112.40 is needed to the first serious sign of medium term bullishness. Otherwise, further decline will remain in favor in case of rebound.

Economic Indicators Update