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USD & JPY Get Haven Bids as Trump Protectionism Returns

USD & JPY Get Haven Bids as Trump Protectionism Returns

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- The Trump administration's decision to put tariffs on imported solar panels and washing machines may stoke fears of trade wars and protectionism.

- Proxies for emerging market growth, the commodity currency bloc - AUD, CAD, and NZD - have been hit hardest by protectionist fears overnight.

- Retail trader sentiment continues to point to a tough trading environment for the US Dollar.

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The end of the US government shutdown doesn't appear to be leaving a lasting impression on markets, which isn't necessarily a surprise when you consider the fact that policymakers merely 'kicked the can down the road' with the three-week continuing resolution. It's possible that we're in the grips of another US government shutdown in a few weeks time.

But the big news for markets yesterday wasn't the end of the US government shutdown. Instead, traders should be more concerned with the Trump administration's decision to levy new tariffs on solar panel and washing machine imports. Already East Asian trading partners have condemned the decision, sparking concerns that the fires of protectionism have been stoked once again.

The timing of the Trump administration's move is curious. Consider that the next round of NAFTA negotiations in Montreal, Canada are beginning today and are set to run through January 28. Given US President Trump's disposition to eliminate the US trade deficit by any means necessary, the move over solar panels and washing machines may be a signal to Canada and Mexico that 'all options are on the table.'

The rise of protectionism, a concern that hasn't been at the forefront of market participants' minds in several months, offers to change the narrative at a time when traders are seeking a new one: the enthusiasm around the tax bill has settled down; concerns about the government shutdown being more than political theater were overblown.

The resulting environment is one that is proving beneficial to the traditional safe haven currencies, Japanese Yen and the US Dollar, and deterimental to the currencies most linked to trade and growth in emerging markets, the commodity currency bloc - the Australian, Canadian, and New Zealand Dollars. We're watching the bearish key reversals and/or outside engulfing bars forming in pairs like AUD/JPY, AUD/USD, CAD/JPY, and NZD/JPY today - a series of developments that would be ominous for risk-correlated assets.

See the above video for a technical overview of the DXY Index, USD/JPY, EUR/USD, GBP/USD, AUD/USD, AUD/JPY, CAD/JPY, and NZD/JPY.

Read more: FX Markets Turn to BOJ & ECB Rate Decision, UK & US GDP in Week Ahead

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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