FX Update: Muted reaction in FX to US-China trade deal

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The narrative in the wake of the US-China trade deal announced late last week is a no brainer for equity markets, but currency traders seem a bit confused on the takeaways here, as many risk sensitive currencies pulled back sharply from a rally late Friday.

The US-China Phase One trade deal, on paper, appears far more comprehensive than many expected, but the headline numbers that China has purportedly promised look difficult to achieve, including $50 billion in agricultural imports from the US (the highest in recent years was a mere $20 billion in 2017) and the increase in goods and services imports of an additional $200 billion above current levels. That is the conclusion in our Saxo Market Call podcast discussion this morning. For perspective on that last number, US goods exports to China totaled $133 billion and US services exports to all destinations totaled $828 billion in 2018, a bit over half of which are travel and financial services.

Besides requirements around Chinese purchases of US goods, the deal includes sections on intellectual property theft, forced technology transfers, currency policy, opening of Chinese markets and more. A dispute-resolution framework is a part of the agreement, in which a US-China working group would get together to resolve disputes and if unable to do so, would be referred to the governments, who could then choose to pass new tariffs. 

The proof from here will be in the truth on the ground and how these numbers start adding up in coming months. The Trump administration may prove reluctant to complain if progress is slow as this could take the edge off the stock market’s rally into the 2020 election. And a cynic might argue that this deal was China’s way to punt the trade issue for now to avoid immediate further pressure on its economy and financial system while steering clear of the US-China relationship becoming a political focus in the US heading into the 2020 election. A few high profile deals and a solid acceleration in purchases of key commodities from the US are the only price for the time bought.

The Euro Zone flash PMI for December out this morning were little cause for holiday cheer, as the German Manufacturing reading headed in the wrong direction from already very low levels, posting a 43.4 vs. the 44.1 in November. Remember that the nature of these surveys means that things must continue to get worse to maintain readings below 50. The France Manufacturing reading, meanwhile, dipped to 50.3 from 51.7 in November, and the broader Euro Zone flash reading number was an ugly 45.9 vs. 46.9 in November. On top of this, beware of the risk of a US-EU trade spat brewing.

Besides the follow-on reaction to the US-China trade deal, we are watching how the situation in US money markets shapes up over year-end and into the New Year as Trump deficits will continue to add pressure on the Fed to expand its balance sheet without end – when does it recognize that fact and make it  transparent to the public?

One of the more confusing reactions in the market was in AUD on Friday, as the initial celebration around the conclusion of the US-China trade deal failed to sustain a bid in AUDUSD and the pair ended the week with a bearish reversal candlestick, so far rejecting the attempt higher. A fresh rally and close back above 0.6900 is needed in the next couple of sessions for this pair to fit the narrative across other markets – especially EM currencies and equities that have celebrated the conclusion of this trade deal. Until then, we have a bearish reversal on our hands with further confirmation that the chart is capped for now if we dip through 0.6825-00.

Source: Saxo Group

The G-10 rundown

USD – the US dollar in solid shape given the US-China trade deal, and we may have to wait for trading to kick off into 2020 to get a sense of direction if the Fed has done enough to keep a lid on liquidity issues into year-end.

EUR – the Euro Zone economy remains in a bad place and we’ll need stronger signs of a resurgence in the Chinese economy for a boost to EU export demand to revive the Euro Zone economy. The EU focus on climate-linked fiscal stimulus may be good for the planet, but will it be positive for real returns prospects for Euro area investors?

JPY – the yen largely weak on as-good-as-it-gets positive risk sentiment, but the situation confused more than lightly by the strong rally in US treasuries on Friday.

GBP – the fresh sterling longs will be vulnerable as the reality of Brexit may not do much to boost the numbers quickly due to the momentum of weak credit impulse built up over the last few quarters. As well, major uncertainties remain around the shape of the eventual trade deal. The flash December UK Manufacturing PMI, matching the cycle worst at 47.4,  is a reminder of the low starting point for the UK economy.

CHF – the EURCHF candlestick on Friday was a reverse image of the reaction in some EM markets and fits with the US treasury rally, but not with the strong risk appetite elsewhere.

AUD – very weak price action in the Aussie relative to the market backdrop – need to see a pick-up sooner rather than later to believe that Friday’s bar was an indication of underlying weakness.

CAD – the loonie standing out on the strong side as the USMCA trade deal nearing passage looks to see Canada avoiding any further negative trade focus. But to get USDCAD down through 1.3000 we need a weaker USD and CAD won’t be a performer on any weaker US economic performance we still fear is a risk.

NZD – the kiwi absorbing some collateral damage from the very weak AUD since Friday – but AUDNZD looking heavy again.

SEK – the Scandies behaving more in line with the playbook in equity markets as positive risk sentiment has driven notable SEK strength and on balance, any removal of global trade uncertainty is a SEK-positive, as is the Riksbank’s assumed rate hike on Thursday. Still, risks for SEK could be budding on any eventual US-EU trade spat.

NOK – EURNOK looking very heavy after the close on Friday and if risk appetite sustains a bid into year-end could take out the pivotal 10.00 area despite the seasonality headwinds for NOK.

Today’s Economic Calendar Highlights (all times GMT)

  • 1330 – US Dec. Empire Manufacturing
  • 1445 – US Dec. Flash PMI
  • 1500 – US Dec. NAHB Housing Market Index

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