The United States and China are at war.  It is a full-blown trade war with tit-for-tat tariffs and the promise of additional tariffs in the future.  The US slapped import duties of 10% on $200 billion of Chinese imports, and China defiantly levied 10% tariffs on $60 billion of US imports.

Global financial market traders collectively felt relieved.  The tariffs were only 10%, not the 25% that was initially planned.  They jumped into riskier assets in Asia and Europe, boosting equity markets and commodity bloc currencies, despite President Trump’s threat to put tariffs on another $267 billion of China imports if China defied him and levied tariffs of their own.

Arguably, the market reaction to the latest tariff salvo is akin to those traders in 2008 who dismissed the Lehman Brothers bankruptcy as “just a one-off.”

The Canadian dollar was in demand as well.  USDCAD is probing support in the 1.2940-50 zone in early New York trading.  Prices are under pressure due to the broad US dollar sell-off overnight with a dash of optimism around the US/Canada trade talks thrown because Canada’s Foreign Minister Chyrstia Freeland is in Washington today for more negotiations.

 President Trump repeated his rant about Canada dairy protection yesterday and said about the talks “They are in a position that is not a good position for Canada.”  House Majority Whip Steve Scalise said Canada was being “uncooperative” and that many in Congress were getting frustrated by Canada’s negotiating tactics.  Access to Canada’s dairy industry and the dispute resolution mechanism are reported to be the sticking points. Prime Minister Trudeau repeated that Canada wouldn’t sign a bad deal which implies he is willing to sacrifice the Canadian auto industry to protect domestic dairy farmers who have an average net worth of $4.0 million.

Asia equity markets reacted to the “less-than-expected” tariff news and rallied. AUDUSD and NZDUSD trade firmly and opened at session highs in New York this morning.  USDJPY traded with a bid but in a narrow 112.24-112.43 range supported by 10-year treasury yields at 3.05%.

GBPUSD spiked to 1.3213 from 1.3142 in Asia after UK inflation data surprised to the upside. (August CPI Actual 2.7% vs forecast 2.4%, Core 2.1% vs forecast 1.8%, y/y)  GBPUSD gains may be hampered due to the UK/EU summit talks in Salzburg today

EURUSD is trading at 1.1700 after touching 1.1713 in Europe.  Stock market gains, diinished Italy budget concerns and a better US/China trade tariff result have combined to underpin the currency.

The US dollar may get a bit of support from this mornings Housing Starts and Building Permits data.

USDCAD Technical Outlook

The intraday USDCAD technicals are bearish below 1.3030, supported by the break below  1.2980.  A move below 1.2920 targets 1.2860, the 61.8% Fiboancci retracement level of the April-June range. For today, support is at 1.2920 and 1.2860. Resistance is at 1.2980 and 1.3020.

Today’s Range 1.2920-1.2980