Forex today: risk-off/risk-on, sentiment is that China and US will behave ... eventually

Forex today was yet again governed by the latest trade war noise with China in it for tit-for-tat, (equivalent retaliation), and striking back with duties on U.S. soybeans and planes. This sent markets into a tailspin, making for an acceleration of the unwind in carry while the  DXY was actually little changed on the day trading in a narrow range.

However, there was a return in risk later in the day with sentiment for negotiations between China and the US and a deal to take place before tariffs kick in - (Treasury Secretary Ross said that these initial threats with China are likely to lead to negotiation). There were also some encouraging NAFTA comments from Trump and his economic advisor Kudlow during the day to lift the spirits. 

The US benchmarks made an impressive reversal with DJIA, after trading over 600 points lower, reversed to close the day up 230 points at 24,264.30 while the Nasdaq Composite and the S&P put up over 1.0% each, to close at 7,042.11 and 2,644.69 respectively. 

Data and US growth outlook were mixed with firm employment and pricing pressures on the rise:

• Headline non-manufacturing ISM fell to 58.8 (consensus: 59.0).
• Factory orders rose 1.2% (consensus: 1.7%). 
• ADP payrolls beat expectations, (241k vs consensus 210k).

As for other currencies, EUR/USD was whipsawed European trade on the back of the Chinese tariff announcements, something that the market might need to get used as the new norm. However, for the time being, market volatility is in play and the euro unwind continues due to the cost of carry and the safe haven bid that the dollar is picking up. 

Nevertheless, the euro actually ended the session higher by 0.07% on the Chinese headlines, boosted in the absence of risk off play - making a high of 1.2315 in European trade, up from the Asian session low of 1.2257. From data overnight, EZ HICP arrived as forecasted at 1.4% yy in March although well below target. NY opened around 1.2285 and rallied to 1.2310 on better risk sentiment before a rise in yields sent the pair back to 1.2280 late in the shift for the Asian handover. eyes are on EZ March Markit comp and services PMIs for Thursday. 

GBP/USD traded between the 10 and 21-D SMAs at 1.4099 and 1.4017 respectively. In European trade, the pair climbed from 1.4055 to 1.4085, but that was ahead of the big miss in the UK's construction PMI, (47.0 vs the 50.8 consensuses). Cable was sent packing back to 1.4052 before overcoming the hit and turned over again back on the bid to 1.4088 the NY high, closing in the 1.4070's.

The cross was higher in European trade, moving up by 0.25p to 0.8745 during the European morning, although succumbed to the broader notion that sterling should be a better bid than the euro on Central Bank divergences and economic performance of late. EUR/GBP bled all the way back down to 0.8720 support.

USD/JPY picked up a bid as stocks made a comeback on Wall Street, (recovering from US-China tariffs news), and rallying from a London low of 105.99 to a high of 106.84 the NY session high, (albeit, still shy of the 107 handle and recent 28th March highs of 107.01). the short of it, is the yen will catch a bid on uncertainty around the trade war angst and eyes are on the 100 level should there be a break down of positive headlines in regards to US/Chinese negotiations, while otherwise, this tit for tat noise keep a lid on the pair's recovery attempts to the 107 handle. Should the two nations find common ground and in an agreement before tariffs take hold, that would be a major positive for the bulls. 

As for the antipodeans, the Kiwi was impressive, with a bounce in Milk prices, improving domestic confidence, and a larger budget surplus yesterday that have all supported the upside to 0.7310. The Aussie, on the other hand, was directly caught up in the trade war noise, opening in the NY session near 0.7680 and lifted as stocks sold off and the yen cross rally taking the Aussie to 0.7721 the NY high, (back above the 10-D SMA) ahead of domestic trade data risk.

Key notes from US sessison:

• Fear, what fear? DJIA recoups roughly 900 points from its pre-opening low
• US formally announced 25% tariffs on more than 1,300 Chinese products - UOB
• US: Order activity ramped back up in February - Wells Fargo
• Gold bears keep the market below the $1,350 resistance as risk appetite returns
• Is the Cold trade war about to turn hot; what are the implications for FX? - ING
• Fed's Bullard: 'more uncertainty' and dovish rhetoric
• US: ISM non-manufacturing and ADP employment data awaited - TDS

Key events ahead:

China is out, but the Aussie trade balance is eyed.