Investor Confusion Over Trade War Escalation Leads to Mixed Forex Results

Typically, the first week of the month is met with a spattering of light indecisive trading as investors prepare for the release of the latest U.S. Non-Farm Payrolls report. The report slate is clean for most of the week with all eyes focused on Friday’s jobs data.

The price action this first week in April was quite different from all the others with the jobs report seemingly taking a backseat to threats of new sanctions from the United States on China and a potentially explosive response from China, which appear to be signaling an escalation in the developing trade war.

Given the two key events, foreign currency traders were forced to make decisions based on the potential impact of a long-term trade war and the direction of U.S. interest rates this year. At times, this produced a choppy, two-sided trade. This sideways price action indicated trader indecision and probably impending volatility.

When the dust settled on Friday, we saw mixed results with some money flowing into safe haven assets, some into export-sensitive currencies and others into interest-rate sensitive currencies.

The U.S. Dollar index finished lower on Friday, but the actual U.S. Dollar closed mixed against individual currencies due to the various responses to the news events of the week. The Greenback traded mixed versus the safe-haven Japanese Yen before settling higher. The dollar was mixed versus the export-sensitive Australian, New Zealand and Canadian Dollars. Interest rate-sensitive currencies like the British Pound and Euro were also mixed against the U.S. Dollar last week.

U.S.-China Trade Events

The week started with China’s finance ministry announcing in a statement published April 1 it would impose retaliatory tariffs on up to 128 kinds of U.S. goods, following through on a treat initially made March 23 by Beijing that it would target $3 billion worth of American imports.

On April 3, President Donald Trump unveiled a list of Chinese imports his administration aims to target as part of a crackdown on what the president deems unfair trade practices.

China, on April 4, countered the latest move by the U.S. by announcing additional tariffs on 106 U.S. products.

On April 5, President Donald Trump said he instructed the United States Trade Representative to consider $100 billion in additional tariffs against China.

The week ended with China’s Commerce Ministry saying the country will not hesitate to react with a “major response” to new tariffs from the U.S.

U.S. Non-Farm Payrolls Report

The Bureau of Labor Statistics reported on Friday that non-farm payrolls rose 103,000 in March while the unemployment rate was 4.1 percent, falling well short of Wall Street expectations during a month where weather caused havoc on the jobs market.

Economists and traders were looking for a payrolls gain of 193,000 and the unemployment rate to decline one-tenth of a point to 4 percent. This number represents a huge drop from the upwardly revised 326,000 in February. January’s figure was revised down from 239,000 to 176,000.

The closely watched average hourly earnings figure rose 0.3 percent against estimates of 0.2 percent. This pushed up the annual rate to 2.7 percent.

Other U.S. News

ISM Manufacturing PMI and ISM Non-Manufacturing PMI came in lower than expected. Finally, Fed Chair Jerome Powell said on Friday the Fed will likely need to keep raising U.S. interest rates to keep inflation under control.

Australian Dollar

The AUD/USD settled the week at .7671, down 0.0005 or -0.07%.

The Reserve Bank of Australia left its benchmark interest rate at historically low levels as expected. It also expressed concerns over low inflation, rising housing prices and low wages.

Retail Sales surprisingly rose 0.6%, beating the 0.3% estimate. The previous number was also revised higher. The Trade Balance also came in better than expected, however, the previous month was revised lower.

New Zealand Dollar

The NZD/USD settled the week at .7269, up 0.0038 or +0.53%.

The New Zealand Dollar rallied to its highest level since March 14 last week, helped by a pickup in consumer confidence, a bigger-than-expected budget surplus and rising property values.

Recent indicators have painted a rosy picture of the NZ economy. Consumer confidence rose last month, according to the ANZ consumer confidence index, while the government’s operating surplus for the first eight months of the year, at $2.85 billion, topped the Treasury’s December forecast of $2.36 billion.

Additionally, the average value of a New Zealand home rose 7.3 percent in the year to March, its biggest gain in nine months. Although daily prices fell at last week’s Global Dairy Trade auction, New Zealand’s biggest product, whole milk powder, gained.

Japanese Yen

The USD/JPY closed last week at 106.913, up 0.653 or +0.61%.

The price action in the Dollar/Yen was mostly fueled by safe haven demand. The Forex pair was particularly sensitive to the elevated volatility levels in the U.S. equity markets.