FX June 10, 2019 / 06:45 am UTC

EUR/USD, USD/JPY Flows: Slight USD recovery on Mexico deal, but...

By Adrian Schmidt

The markets were upbeat following the news that the U.S. would not be imposing a 5% tariff on Mexican products after the U.S. and Mexico reached a deal over the weekend. As well as the obvious gains for MXN, there has been a general risk-positive reaction, with USDJPY gapping higher at the open in Asia. However, AUD has more than reversed initial gains, in part because of the rise in USDCNH, which jumped in Asia after hitting new post-November highs on Friday. While the Mexico news is welcome, it was largely expected. The next focus is on U.S./China trade, and there is no evidence of any progress on this end. A weak CNH is likely to translate to a weak AUD, and if the U.S. threat to impose tariffs on the remaining $300 billion of imports from China is carried out, risk appetite and equities can be expected to reverse recent gains.

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There still may be scope for some modest USDJPY gains against this background, but anything near 109 still looks like a selling opportunity given the uncertainty surrounding risk appetite and the potential for Fed easing that has triggered a narrowing of the yield spread in favor of USD. For EURUSD, the Mexico deal helped with a modest USD recovery, but the yield spread move from the past couple of weeks and the break above the downward channel seen last week remain relevant. There is some scope for USD recovery to extend, but it is likely to require a significant change in the Fed view to allow a break below 1.1260/70, and this will be hard to achieve while the threat of more China tariffs hangs over the market.

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I, Adrian Schmidt, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.