The combined macro themes of “Trade-War” and “Watching 7” have reasserted themselves disrupting finncial markets today. Overnight, China let its currency depreciate past the market psychologically important level of 7. The People’s Bank of China (“PBOC”) released a statement on its website saying the depreciation the Yuan vs. USD was “influenced by unilateralism and protectionist measures.”


Last week, a day after the Federal Reserve cut its policy rate 25bps, on August 1st, President Trump announced via Twitter that a 10% tariff would be imposed on $300 billion worth of China goods on September 1st. China answered back today with the Yuan depreciation and by asking its state-owned companies to suspend imports of US agricultural products.


This rattled financial markets: the VIX Index, a measure of volatility, spiked above 22. At the time of writing, the DJIA is down over 800 points. The US 10 year yield has melted to an intraday low of 1.7278 so far. The USD index is weak, largely due to Euro strength today as it comprises over 57% of the USD Index.


Chart: Trade War Escalation Causes Fall in US 10yr and 2yr yields and Weighs on USD Index (source: Bloomberg)

The depreciation of Yuan has weighed on AUDUSD which has weakened along with it – chart below. It will be difficult for AUDUSD to bounce back/rally meaningfully while China depreciates its currency. This phenomenon will continue to weigh on AUDUSD.


Chart: China Yuan (axis inverted, rs)  Depreciation Weighs on AUDUSD    (source: Bloomberg)


On the topic of AUD, AUDNZD is back below 1.0400 after initially breaking that support August 1st. There really isn’t any substantial support in the cross until 1.0300 and 1.2760. In terms of that cross, later today, NZ employment data for Q2 are due and it is most important to watch the unemployment rate, which is expected to rise to 4.3%. As long as the unemployment rate isn’t higher than expected – which could weaken NZD, downward pressure on AUDNZD should continue.



I write about how large intraday losses in FAANG stocks weigh on USDJPY intraday, strengthening JPY vs. USD. Of course, as a safe-have currency, JPY also strengthens when volatility spikes – both of these events happened today. The chart below shows how USDJPY moved lower today in response to the spike in the VIX Index, a measure of volatility, and the move lower in FAANG plus Microsoft.  The spike in the VIX and the losses in FAANG plus Microsoft negatively impacted US Equity indexes overall.


Chart: FAANG Stock +Microsoft Index vs VIX Index (ls, inverted)  and USDJPY (source: Bloomberg)


USDJPY support comes in at 105.79 – today’s intraday low so far, 105.00 and 104.87, the January low. As long as the VIX Index is above 20.0, JPY strength should be supported. Looking at JPY crosses, AUDJPY has had a big move lower today – about 1.0%.  AUDJPY support at 71.00 and 70.64, the January low.


So, who is winning the trade war? Bonds. Also, a safe haven/flight to quality asset, bonds have benefited with risk-off market sentiment today. As mentioned above, the US 10 year bond yield is lower today — 1.7345% at the time of writing vs Friday’s close of 1.8452%. This move down gives US homeowners another chance to refinance their mortgages.

If you would like more market commentary and updates, join me on social: twitter @ameliabourdeau and IG @marketcompass