USD firms on US/China trade tensions – Scotiabank

Renewed US/China trade tensions Friday following President Trump’s threat of 'massive tariffs' in response to China’s 'hostile' moves to curb rareearth exports prompted a sharp fall in stocks and 'Dr Copper' followed suit amid concerns of more headwinds for global growth, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD gains broadly as trade tensions dampen risk appetite

"Those worries have developed over the long weekend in North America, with China threatening retaliation and saying it will take the trade and tariff fight 'to the end'. Global stocks are soft while bonds are firmer. Gold reached a new record high above $4150 earlier amid elevated market volatility. Uncertainty is supporting the recent rebound in the USD and high beta FX is underperforming on the session. Measured correlations across our equity/FX screen have been subdued in recent weeks but are strengthening."

"Notable developments recently include the strengthening positive correlation between the S&P 500 and the MXN (+76% on a rolling 22-day correlation) and the developing, negative correlation between the CHF and US stocks (-37%). On the session today, those trends are reflected somewhat in price action. The AUD, NOK and MXN are leading losses among the majors while the JPY and CHF are outperforming. The broader rebound in the USD overall is supporting the DXY near last week’s high, but just below the 100 level. Dollar gains look poised to extend a little more overall in the short run at least despite obvious worries about its longer term prospects (Fed rate policy, trade and tariff effects on growth and weak fiscal policy)."

"Also last week, the US administration confirmed the beginning of federal worker layoffs as the government shutdown persists. If these layoffs become widespread, they could dampen support for the USD, as the economic effect of the shutdown may shift from being a temporary disruption to a more permanent setback. It’s another day of little (or no major) data. A number of central bank officials from the Fed, ECB, BoE, RBA and RBNZ are speaking, however. That list includes Fed chair Powell who is talking on the economic and monetary policy outlook at 12.20ET. China releases CPI and PPI data this evening."