As we noted into today’s handover, the US hiked Tariffs from 10% to 25% on $200bn of Chinese goods. Within minutes, China vowed to retaliate although they stopped short on details.

Looking at data from 2018, the US has imposed tariffs on 47% of all Chinese imports of more than $250bn worth of goods, whilst China has imposed tariffs on 91% of US imports worth over $110bn. The way things are headed, these numbers are only likely to go up.

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Still, trade talks are set to resume on Friday so a slimmer of hope remains, although we’d expect risk-assets to plummet without a deal. Typically, this means that volatility will spike, stocks, bond and bond yields fall whilst safe havens such as JPY, CHF and gold appreciates. On Thursday the VIX hit a 4-month high and saw it most volatile 4-day range since early October. Whilst it went on to close lower on the session, we’d expect this range to move higher if no deal is struck by the close. Either way, the outcome of trade negotiations will likely be a binary outcome for sentiment.

USDCNH remains a core focus for markets around the US-China trade talks. We noted the Yuan was weakening ahead of the talks and cannot help but wonder if it’s to be used as a bargaining chip (or warning) within the negotiations.

At the time of writing this week’s break is holding above the 6.82 high and momentum remains favourable for further gains, with the MACD pointing defiantly higher. Bullish targets remain the 6.92 and 0.698 highs and, if prices are to retrace, we’d prefer to wait for a base to build above the gap before considering long positions. A break below 6.76 would remove it from our bullish watchlist, and enter the ‘short’ watchlist if it went to break the 6.67 lows.

USD/JPY remains anchored to the 109.71 low as it mulls overt its next move. We had pencilled in a minor technical bounce yesterday, yet this clearly didn’t materialise with the current ‘risk-off’ sentiment. The MACD points firmly lower and it also created a bearish divergence with the prior tops ahead of its decline. And, if no deal is reached there’s a real risk USD/JPY could slide heading into the close as traders won’t want to be short the yen over the weekend. Remembering that the yen broadly gapped higher on Monday thanks to Trump’s late-night Sunday tweet, which could well be repeated in a no-deal scenario.

For now bears would be tempted to fade into rallies on lower timeframes, and a break of yesterday’s low signals further downside as we head into the weekend.

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