US Brandishes Tariff Weapon And Weakens Animal Spirits

The dollar posted a potential key downside reversal against the yen yesterday, by trading on both sides of the pre-weekend range and settling below that low. However, there has been no follow-through selling. News that the Government's Pension Investment Fund (GPIF) will no longer lend out its equity holdings to short-sellers failed to have an immediate impact. The dollar, which was testing JPY109.75 yesterday, has not been above JPY109.20 today. There is a $780 mln option struck at JPY109.10 that expires today. Support is seen near JPY108.80. A break could signal another half yen decline. The Australian dollar has seen strong follow-through buying today. It bottomed yesterday near $0.6755 and is near $0.6860 in the European morning. It is testing the (61.8%) retracement of the decline in the past month. The $0.6900-$0.6920 is the next technical objective. The US dollar edged higher against the Chinese yuan to resurface above  CNY7.05, to reach its best level since late October. 


France also became subject to US tariff threats yesterday. The 90-day grace period since the US concluded that France's digital tax hurts US interests ended last week. The Trump Administration has threatened up to 100% tariffs on about $2.4 bln of French goods (mostly consumer goods like wine, cheese, handbags, and cosmetics). The next step is for public hearings. The US also said it will investigate if Austria, Italy, and Turkey should be subject to retaliatory action as well. Note that UK Prime Minister Johnson has also advocated a similar tax. A global solution seems preferable and an EU solution second best, but the failure of both left it in individual countries' hands. 

Like the manufacturing PMI, the UK's construction PMI rose a little more than expected but is still in contracting mode. Yesterday's manufacturing PMI showed an improvement from the flash reading but was still lower than October. The construction PMI was sequentially better at 45.3 from 44.2 in October. It matches the best level since May but remains below the 50 boom/bust level. Last November, it stood at 54.3.  The final services and composite PMI will be reported tomorrow.  

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Read more by Marc on his site Marc to Market.

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