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The trade war is back and investors don’t like it. The U.S. dollar traded higher against all of the major currencies Friday on the back of a stronger jobs report and President Trump’s threat of fresh tariffs on China and Japan. Stocks extended their slide and unless the president retracts his threats, further losses are likely, which means more risk aversion and losses for the major currencies. Friday’s nonfarm payrolls report guarantees a Fed hike on September 26. Not only were there more than 200K jobs created in August but, wages are growing! Average hourly earnings rose 0.4% last month, the strongest pace of growth in nearly a year. Between the record highs in U.S. stocks last month and the pickup in earnings, next week’s retail sales could surprise to the upside as well. Comments from U.S. policymakers have also been hawkish with Fed Presidents Mester, Rosengren and Kaplan looking for the policy rate to move toward neutral. The greenback should extend its gains versus Eur, Aud and other major currencies, but the outlook for USD/JPY is tricky. USD/JPY dropped as safe haven carry flows returned home after President Trump hinted that Japan could be the target for their next trade fight. He’s focused on reducing deficits and in a phone interview with the Wall Street Journal he said they may not be happy “as soon as I tell them how much they have to pay.” Late Friday, he also tightened the noose on China by threatening to impose another $267B in tariffs. These threats make it very difficult for stocks and USD/JPY to rise. Although the yen crosses could be hit the hardest, if Trump throws out more threats next week or China/Japan return with hard words of their own, USD/JPY will fall. At the beginning of the month we talked about how September is historically a weak month for stocks and President Trump’s trade war could make things even worse. The Australian and New Zealand dollars hit a 2-year low and further losses are likely. AUD/USD was hit the hardest by President Trump’s threat of new tariffs on China. Between the mortgage rate hikes, global trade tensions and yuan weakness, the outlook for Australia is grim and therefore AUD/USD could extend its slide below 70 cents. The New Zealand dollar also tumbled – there’s been an irrefutable downtrend in New Zealand data and the deterioration should be evident in next week’s manufacturing PMI report. We believe there could be another 2% to 3% drop in NZD/USD before the pair finds a bottom. On Friday we learned that Canada lost 51K jobs last month with the nation’s largest province, Ontario, seeing part-time work decline by the biggest amount in close to a decade. The increase in full-time work is encouraging but with such a significant pullback, the economy is not at risk of overheating. However the market is looking for a rate hike from the Bank of Canada this year and according to Deputy Governor Wilkins, the central bank debated dropping the line “gradual approach” to rate hikes from their policy statement, adding that normally there would be a rise at this point to preempt inflation. This tells us that the central bank is clearly hawkish and open to the idea of raising interest rate before the end of the year. Yet they also don’t want to pre-commit without seeing how the trade talks progress. If a deal with the U.S. is reached before the October meeting, there’s nothing standing in the way of a hike. Not only would we see USD/CAD fall aggressively when the headline hits, but it will be the start of a new downtrend that could take the pair down to 1.29. If there’s no deal, USD/CAD could hold strong into the rate decision. Pay atention about forex economics fundamentals here!