FX Update: Where to focus now that US-China trade deal delivered

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The US-China trade deal is now signed but the delivery and enforcement is the factor to watch over the coming months, while we watch whether this signing serves as a pivot point for market psychology, especially as focus may return to the Fed, the incoming data and the US presidential election in the weeks to come.


The US-China trade deal has now been signed after yesterday’s ceremony at the White House and the 86 pages of the deal’s terms cover a fairly comprehensive extent of the US-China trade relationship, including sections on technology transfer and intellectual property theft as well as terms of conflict resolution. The sticking point that many have rightly focused on is the explicit purchases promised from the Chinese side in exchange for – remarkably few details on this – US tariff reductions. As a Bloomberg article points out, the advance of $200 billion would require a growth in US exports to China on the order of +56% and others have pointed out that specific product categories – especially energy exports like LNG and crude oil – would have to grow by several multiples. In short, the proof will be in how the actual export data shapes up, and already soybeans futures in the US seem to be showing skepticism with a sharp move lower yesterday on the lack of details on soy purchases and as China has said that it will buy according to demand.

Now that we are free of the US-China trade deal distraction and have to wait at least a monthly cycle or two for the signs of Chinese purchases to materialize, etc,  we see three primary distractions for equities and currencies – the Fed, the direction of US data, and developments in the US election. The chief risk in the near term from the Fed is that other Fed voters – particularly Powell himself – echoing the rhetoric from Fed voter Kaplan of the Dallas Fed, who was out yesterday suggesting that the Fed should be “sensitive” to elevated risk-asset valuations. As for US data, we still have our concerns, but more evidence needed in the January data cycle to put this one on the front burner.

Now, on to the US election, which will occupy increasing market bandwidth until early November: The US-China trade deal signing could mark at least a temporary “peak Trump” moment as oddsmakers are strongly tilting in favour of his re-election relative to the recent past. As well, the last debate ahead of the first of the Democratic primaries in Iowa on February 3, have many analysts wringing their hands on the weakness of the Democratic field on concern that whoever emerges could fail to excite voters. The chief problem for Democrats is the internal divide between moderates like Biden, seen as likely to reap some independent votes and centrists, the more left-leaning progressives, the party’s more impassioned base that want to raise tax the wealthy and shake up the system to extend benefits like health, education and higher pay to the young and poor, possibly scaring away higher earning centrists. Polling tendencies and primary results deserve close attention from here – already on March 3 we have “Super Tuesday”, with some of the largest US states holding their primaries on that date, including Texas and California, and represents a third of all delegate votes for the nomination.

Chart: EURCHF
We continue to focus on EURCHF, as the franc remains one of the few currencies on the move, pressing to strong new lows below 1.0800, possibly on the US early this week placing Switzerland back on its watchlist of currency manipulators, suggesting that the SNB will have far less leeway to intervene if we are facing a re-rating of the exchange rate here. Note as well that USDCHF has punched down to a new cycle low below 2019 lows today.

Source: Saxo Group

The G-10 rundown

USD – not following through higher – what will reactivity be to a the trio of factors we list above: the Fed (can’t get more dovish than market expects?), the economy (market too complacent on downside risks), and the US presidential election (odds too tilted for Trump?). It’s a difficult mix.

EUR – the euro inert as we await the implementation and timeframe of physical as well as the result of the ECB’s policy review. Interesting to note ECB’s Holzmann out talking up the deleterious effects of negative rates yesterday and president Lagarde speaks today.

JPY – the yen on its back foot as all cylinders firing in favour of risk appetite into today, including bonds tipping back lower after yesterday’s rally.

GBP – a weak CPI yesterday (core year-on-year at cycle low 1.4% vs. 1.7% expected) saw a modest reaction. Neutralizing our our former tactical pessimism as sterling looking resilient here.

CHF – EURCHF is into new territory below 1.0800, watching whether there is enough of a psychology shift from the idea that SNB is far more reluctant to intervene against further CHF strength. See yesterday’s piece trading EURCHF downside.

AUD – the Aussie making life difficult for the bears – as with the EURUSD – in failing to follow through lower versus the US dollar. Having paused for so long after the bearish reversal, the tactical view is rapidly neutralizing, but we need to vault above . Meanwhile, prefer AUDNZD and AUDCAD as possible vehicles for a more constructive AUD outlook in the crosses.

CAD – USDCAD getting bogged down here – with CAD most at risk from a turn south in the US and Canada’s US-dependent economy from here and we suspect a strong  risk of downside pressure on the BoC rate outlook.

NZD – a massive December House Sales number out overnight, but December Card spending (retail activity) was very weak at -0.8% month-on-month. We still look for upside potential in AUDNZD toward 1.0600 to start, but note that push below 0.6600 in NZDUSD saw a sharp rejection yesterday.

SEK – we are getting lulled gently back to sleep here – need a fundamental catalyst to jolt SEK stronger – meanwhile, technical focus is on whether 9.60-2 resistance zone holds.

NOK – EURNOK has been dead for more than three weeks and risk/reward does not look attractive for testing in current area. Areas of stress are 10.00 and 9.80 for next steps – meanwhile a strong fundamental upswing in the EU and global economy needed for a more supportive backdrop for NOK.

Today’s Economic Calendar Highlights

  • 1330 – US Jan. Philadelphia Fed Business Survey
  • 1330 – US Dec. Retail Sales
  • 1330 – US Weekly Initial Jobless Claims
  • 1500 – US Jan. NAHB Housing Market index
  • 1800 – ECB President Lagarde to Speak
  • 2130 – New Zealand Dec. BusinessNZ Manufacturing PMI
  • 0200 – China Dec. Retail Sales, Industrial Production
  • 0200 – China Q4 GDP
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