New Tariffs on Mexico
In the G10 yields are falling. In the U.S, there have been periods were inverted yields curves have not to lead to an economic recession. However, never has a recession transpired without an inverted yield curve. Market has been debating whether the current bond pricing is signaling, weak GDP growth or abnormality of a dysfunctional market. The curves have buckled under increase expectations that the Fed will be forced to cut interest rates in the next few years. While TIPS at 1.60% is a sign that, the bond market sees no inflation ahead. In general, we have been leading towards abnormality, as a catalyst for a severe economic contraction was had not materialized. Trade tensions have tested our outlook but each time calmer events have pulled us back from the abyss. Yet, recent actions by US President Trump suggests that walking back the damage done by threats and actual tariffs have become impossible. There are reports of corporations permanently altering supply chains to avoid potential disruptions.
US equity futures are trading lower in response to Trump’s recent tweet. In a typical tweeter storm, followed by a statement released by the White House, Trump said he would utilize the International Emergency Economic Powers Act to levy a 5% tariff on all goods imported from Mexico starting June 10th, and raise the tariff progressively, reaching 25% on Oct. 1st. Trade has now become Trump principal policy hammer. While the raw approach might appeal to his base, this is not how you treat allies or major trading partners. Trump wants Mexico to addressed illegal immigration to the U.S but the cross-policy approach is risky. Mexico is the US third largest trading partner, and also have levers. Mexico officials have responded with a potential 10% import tariff across the board on all imports from the United States. New tariffs on Mexico sent MXN under heavy selling pressure, which pushed USDMXN through key resistance levels, including the break above the March high at 19.6215. We would anticipate the extension of bullish momentum to 20.2070 (fibo lvl).
It might have been the Feds overtighten that has sent the US economy toward recession. But it’s Trump ignorance that will push the American economy off the cliff.
JPY in spree as trade war narrative resumes
The resumption of trade war headlines has pushed JPY into demand, as optimism over a potential recovery of world economies along 2H 2019 is mitigated. June Trump – Xi meeting at G20 summit in Japan is not expected to show much progress and the threat of potential tariffs on Mexico are not putting investors in the mood. Furthermore, recent four-day Trump – Abe meeting in Japan did not bring much as both leaders face resp. presidential elections in November 2020 and upper house elections along 21 July 2019. USD/JPY is now down -0.80% year-to-date and trades at 4 months low.
The downtrend in USD/JPY from 109.62 (30 May 2019) sustains as the pair confirms a bearish breakout after reaching major support at 108.89 (31 January 2019). The 1-month 25-delta risk reversal gauge dropped from -1.54% to -1.83%, suggesting higher volatility on the downside. Economic data published in Japan are generally positive, with April unemployment rate dropping by 0.10% to 2.40% despite a wide gap in the job availability metric given at 1.63%, its higher level in more than 40 years and which confirms major manpower shortage due to an aging population. April industrial production rose 0.60% from prior month (y/y: -1.10%) as firms were ramping up production following 10-day Golden Week Holidays while retail sales came flat m/m (y/y: 0.50%).
In current setting, we expect USD/JPY collapse to stop, as US data should somewhat support the greenback. Approaching 109.20 short-term.