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Currency ports reigned when traders returned to their desks early Monday after an action-packed weekend that did not cease the escalating tensions between the United States and China.
President Donald Trump's hammerlock in fighting China any way he can when the two superpowers are struggling to make a deal was already evident after announcing additional tariffs on Chinese products just as markets closed on Friday.
As the trade shift grows, traders have lifted the chances of three interest rate cuts in 2019 by the Federal Reserve. Chairman Jerome Powell's warning on Jackson Hole Friday that the US economy faces "significant risks" was quickly met with new threats from Trump about further action against China. While the decision to introduce additional tariffs lacked speculation about a stronger US response, such as foreign exchange intervention, the odds are still weak for a trade deal at any time. All this means that the trading week should start with a fever.
"The market now expects trading tensions to unleash an even greater deflationary force and growth hit than it did last week," said Marc Chandler, chief market strategist at Bannockburn Global Forex. “We can expect a weaker solution for the yuan against the dollar. Port currencies, like the yen and Swiss francs, will be in demand, and those tied to growth – including the Australian, New Zealand and Canadian dollars – will be under pressure. "
U.S. stock futures fell more than 1% and Tokyo and Hong Kong contracts were more than 2% lower in the wake of a 2.6% fall in the S&P 500 index on Friday. The Yen advanced against all major currencies, climbing up 0.9% to 104.46, while bonds in Australia and New Zealand rose. More demand for aircraft to safety could push the 10-year government rate down this week after it closed just over 1.5% on Friday.
"Speculators will continue to push up bids for the yen," said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. "Japanese authorities are likely to take a wait-and-see attitude for now, but a meeting over $ 100 per dollar may see no answer."
Kiwi and Australian dollars fell as much as 1% as Asian trading day got on Monday. Meanwhile, the Turkish lira suddenly plunged as much as 12% against the yen in a flash crash, prompting speculation that Japanese retail investors are holding long positions.
Two top White House officials said President Trump has the authority to force US companies to leave China, as he claims – but whether he invokes power is another matter.
Treasury Secretary Steven Mnuchin, speaking at "Fox News Sunday" from the Group of Seven meeting in Biarritz, France, said that Trump would have the ability under the International Emergency Act if he declared an emergency. White House finance director Larry Kudlow agreed to an interview on CNN's "State of the Union," but said "there's nothing right now in the cards" to do so.
"The latest round of customs declarations" released on Friday "involves moderating further escalation and increasing the risk of more escalation going forward, making us cautious in the very short term," said Ebrahim Rahbari, Citigroup's global leader in currency analysis . The yuan "is likely to weaken further" with the offshore yuan to reach 7.5 in the coming months.
Trump's piling on more criticism of Powell on Friday, along with his call on US companies operating in China to consider leaving, pummeled markets is entering the weekend. This backdrop also sent a key slice of the yield curve, which is carefully looked at as a measure of an imminent recession, further into inversion as traders looked at the growth prospects as bleak and increased the cuts to the Fed cuts.
The gap between three-month yields and yields on 10-year government bonds fell to as low as -45.9 basis points on Friday – at least since March 2007.
“The escalation of the trade war could widen the bond rally further , with an increased likelihood of US teenagers considering return times for all time set in 2016, "- to 1.318%, a team of strategists at Goldman Sachs Group Inc. including Praveen Korapaty wrote on Sunday. "Cross-border flows into US dollars of fixed income, driven by an increase in debt with a negative return, cannot moderate without wide improvement in data."
There is about $ 16 trillion of global debt pool with sub-zero rates. Treasuries have gained 8.4%, leaving them on track for their best annual performance since 2011, according to the Bloomberg Barclays US Treasury Index.
A dive in the greenback friday also sparked renewed speculation the US may intervene to weaken the currency.  Bloomberg Dollar Spot Index fell 0.35% on Friday.
In addition to the nervousness was a group of seven rallies in Biarritz, France, where French President Emmanuel Macron seemed to anger the United States by trying to put climate change at the top of the agenda. The meeting can be closed without final communication.
"The US-China trade war is now escalating at a confusing pace, which is likely to trigger further market volatility and expectations of increasingly aggressive monetary relief from the Federal Reserve," said Patrick Wacker, a fund manager for future market revenues at UOB Asset Management Ltd. in Singapore. "The yuan will continue to fall to the bottom of the new short-term range 7.05-7.25 against the dollar."
On Sunday, possible signs of Trump regretting being aggressive towards China at the G-7 rally soon subsided when the White House said the media misinterpreted its initial remarks, which would only add to the outlook, some analysts predicted.
White House Press Secretary Stephanie Grisham said Trump did not regret starting a trade war, but he has other thoughts about whether he should have hit the Chinese even harder.
Trump's comment followed by reversal only "adds more us to the markets, increasing the odds of a US recession, "said Andrew Brenner, head of international interest rates at Natalliance Securities in New York.
(Updates with 7th yen comment, new currency levels)
– With help from Filipe Pacheco.
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