Over the last few weeks, financial markets have been mainly driven by escalating trade tensions between the US and China. Last Friday, the White House took a first stab as Donald Trump imposed new tariffs on $34bn of Chinese imports and announced it could lift the amount by another $16bn to a total of $50bn in the near future.
He also threatened that it could reach $550bn should China retaliates. The last threat didn’t impress the Chinese government, as it is retaliating with tariffs on $34bn of US imports and is planning to implement it immediately.
The lack of reaction in the FX market suggests that investors struggle to understand how the trade war will affect the global economy. Even though the dollar eased somewhat on Friday morning, most FX pairs were little changed after the announcement. Neither was a clear trend in the equity market.
Surprisingly, investors reacted strongly to the publication of June nonfarm payrolls. Indeed, despite the fact that the US economy added more private jobs than expected (213k versus 195k expected), the dollar fell sharply following the announcement. The unemployment rate ticked up to 4% (from 3.8% in May) amid an increased number of job seekers. However, it looks like market participants chose to focus on the lack of positive pressure on wage. Indeed, wage growth is the only missing piece of the full employment puzzle. Average weekly earnings increased only 2.7% (versus 2.8% expected), which means that on an inflation adjusted basis wage growth would stall if not contract in June (headline inflation rose 2.8%y/y in May and is expected to have increased 2.9% in June – thanks to rising oil prices).
As trade tensions continue to escalate, foreign direct investment will continue to shrink in the US. It will therefore prevent employees to act to aggressively and will keep wage under pressure. In addition, the sanctions imposed by China will act as a drag on US growth. Therefore, we won’t be surprised should the Fed use a more cautious tone going forward. Nevertheless, one has to keep in mind that this is just the beginning and that one cannot rule out the possibility that the two largest economies sit at the negotiation table.
Disclaimer: While every effort has been made to ensure that the datat quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein. This document does not constitute a recommendation o sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investment.
Although every investment involves some degree of risk, the risk of loss trading off-exchange forex contracts can be substantial. Therefore if you are considering trading in this market, you should be aware of the risks associated with this product so you can make informed decisions prior to investing. The material presented here in not to be construed as trading advice or strategy. Swissquote Bank makes a strong effort to use reliable, expansive information, but we make no representation that it is accurate or complete. In addition, we have no obligation to notify you when opinions or data in this material change. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments.