Global financial markets remain on edge as global trade tensions escalate, coupled with high expectations that the US Federal Reserve (Fed) will ease its monetary policy in the near future.
US President Donald Trump has once again stoked uncertainty by threatening to impose tariffs on Japan, citing the country's restrictions on US agricultural exports, particularly rice. Although the US dollar has recovered slightly from its lowest level in several years, investor risk appetite remains fragile.
More worryingly, the July 9 deadline for tariff negotiations is approaching, while the June Non-Farm Payroll report will be published this Thursday, just a day before the US Independence Day holiday. These two major catalysts are expected to be the starting point for the Fed's policy direction and the movement of major world currencies.
US-Japan Trade Rhetoric Opens Space for New Policy Risks
Trump's statement on Japan is seen as a continuation of the 'America First' approach that often threatens US trading partners openly before holding closed-door negotiations. This time, Tokyo is the target after allegedly blocking US rice imports.
Market impact:
If the rhetoric ends with tangible action such as tariffs, demand for safe haven currencies such as the Japanese Yen (JPY) and Swiss Franc (CHF) is expected to increase.
Conversely, if the market expects the Fed to respond with policy easing, the US dollar may continue to decline.
Focus Now Shifts to US Jobs Data
The Fed has repeatedly stressed that all policy decisions will be guided by economic data. Therefore, the June jobs report on Thursday will be the main focus.
Market forecasts are expecting job gains of only 110,000, lower than the 139,000 in May. If this figure is confirmed, coupled with slowing wage growth, it will strengthen the argument that the Fed should start cutting rates sooner.
Market response:
Expectations for a rate cut at the July meeting are now rising.
Any negative jobs shocks will trigger a dollar slide, especially against pro-cyclical currencies such as the Australian Dollar (AUD), New Zealand Dollar (NZD) and several emerging market currencies (EMFX).
Risk Themes and Market Drivers
Risk ThemesMarket ImpactImpact on Currencies
US jobs data weak Fed easing potential rises USD falls, EUR, AUD, NZD gains
Tariff deadline extended Risk sentiment improves Commodity currencies strengthen
Tariffs to be implemented on July 9 Trade tensions escalate JPY & CHF strengthen AUD depressed
Powell's remarks at ECB Forum Dovish stance could continue to weigh on USD EUR and risk assets find support
Japan reacts / G7 criticism Adds regional uncertainty JPY strengthens export-sensitive Asian currencies hit
Conclusion: Policy & Trade Will Be the Key
FX markets are currently navigating a delicate balance between fiscal pressure and central bank responsiveness. President Trump's trade rhetoric, while sometimes ending in compromise, has maintained a risk premium in currency markets.
With the US jobs report due out soon, investors are in a wait and see mode. If the payrolls and employment numbers are too weak, the Fed may have no choice but to accelerate rate cuts, which would certainly weaken the dollar further in a lower yield environment.
SARACEN MARKETS View:
Retain flexible exposure to pro-cyclical currencies.
Hedging defensively ahead of the jobs report and tariff deadline.
The main opportunity now lies in USD short positions versus EUR, AUD .
Tactical longs could also be considered on JPY and CHF as geopolitical hedges.
