FX Update: Trade talks to focus on FX? Likely EURUSD implications if so… FX Update: Trade talks to focus on FX? Likely EURUSD implications if so… FX Update: Trade talks to focus on FX? Likely EURUSD implications if so…

FX Update: Trade talks to focus on FX? Likely EURUSD implications if so…

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market is already reacting to news headlines citing unnamed officials close to the US-China trade talks. If the story is correct that a deal could focus in particular on currency issues (Chinese promises to not devalue in exchange for US concessions on tariffs or other measures), then there could be important implications for the USD outside of USDCNH, most immediately for EURUSD.

US stock futures and USDCNH were all over the map overnight, first on stories citing two sources close to the US-China trade talks that there was no real progress and that the Chinese delegation could already be set to leave Washington a day earlier than scheduled (at the end of today rather than Friday). But later, stories cited a possible focus on a “currency pact” between the two sides, apparently a recirculation of something that had been agreed in a previous round of talks. And if an agreement on currency is a part of the deal (likely some promise from the Chinese side not to devalue in exchange for US concessions on tariffs) this could have important implications for the level of the US dollar elsewhere, especially versus the Euro. After all, while the Trump administration has agreed to a minor trade deal with Japan, if one that still leaves the auto tariff issue dangling, the trade confrontation with the EU is ongoing and a new schedule of tariffs is set to go into effect next week against the EU. Trump could easily pick up the currency angle with the EU as well.

As well, we get the FT out overnight (paywall) with a story saying that Draghi went against the “in-house advice” on restarting QE – we could see some interesting details emerge related to this in today’s ECB minutes. We already know that representatives of the core EU countries were against restarting QE anyway and assess that ECB policy is at the end of the road, but the minutes might give a better sense of the internal debate. We’re constructive on this move above 1.1000 in EURUSD, though we’ll need to see the move survive the end of the week and the US-China trade talk outcome, as we discuss below in the chart.

EURGBP has slipped above 0.9000, as UK Prime Minister Boris Johnson is set to meet with his Irish counterpart for last ditch negotiations ahead off the EU summit in a week’s time and Parliament’s Oct 19 deadline for requiring an extension to avoid a No Deal. The UK September RICS House Price data was actually far less depressing, at -2% than expected (-7%) and two points higher from the previous reading, but we are registering the most contracted negative credit impulse readings for the UK since the early 1990’s. This morning the UK reports Aug. Manufacturing and Trade Balance data.

The Swedish krona is clawing back some of the ground it has lost recently after it crossed to new lows for the cycle in recent days versus the Euro. Today’s September CPI release was stronger than expected, with headline inflation rising to 1.5% YoY from 1.4% in Aug and vs. 1.3% expected. Core inflation stayed at 1.3% vs. 1.2% expected. Norway’s CPI release was elevated, with a 2.2% core YoY CPI reading versus 2.1% expected.

EURUSD has crossed above 1.1000 for the first time in more than a couple of weeks as we await the ECB minutes up later and a possible further sense that the outgoing Draghi was going rogue in restarting QE – a policy that could be reversed down the road, and even if not, the ECB is at the end of its policy rope and future EU-US trade policy discussions could see currency entering the discussion. Let’s see if the EURUSD move holds here, but we are constructive on this proving the beginning of something, with further confirmation that the pair has at least neutralized the downtrend on a close into the 1.1075-1.1100 area.

Source: Saxo Group

The G-10 rundown

USD – the Powell Fed is going to bring liquidity and Trump wants to focus on currency – we may finally be reaching critical mass to turn the tide against the US dollar

EUR – the EURUSD move higher today looks important, but needs to find further sustenance from the US-China trade talk outcome. But regardless, the issue of the EURUSD being at the end of its policy rope remains as a broad supporting factor for the euro, that could be supercharged by a clear fiscal focus in EU policy somewhere down the road.

JPY – the yen a bit more insulated than the euro from any US-China “currency pact” talk because of the US-Japan limited trade deal, and the market is fearing a BoJ move at its meeting later this month, but the JPY looks too weak here relative to the bond market unless risk appetite goes into full upswing mode.

GBP – market may need firmer indications on No Deal Brexit risks to weaken further now that it has made a major reassessment after the August-September sterling rally.

CHF – the factors discussed above could also drag EURCHF significantly higher.

AUD – trading awfully quietly, even through all of the headlines overnight. Certainly, almost any form of deal, limited or otherwise, could support an AUD rally – supported technically by momentum having long ago left the scene in the AUDUSD sell-off.

CAD – the loonie could prove vulnerable in the crosses (think AUDCAD in particular) if the US-China trade talks prove more productive than anticipated

NZD – the kiwi having a hard time gaining momentum here versus the AUD, but we have to await outcomes of the US-China trade talks. A limited deal would likely favour AUD more than NZD, so hard for traders to decide whether to jump in here for fresh AUDNZD longs or wait for a deeper consolidation.

SEK – a minor beat on inflation may not be enough to turn the tide back higher for SEK, though a narrative shift here on the euro as per our discussion above could be something that changes the market’s assessment for SEK  as well. A lot of wood to chop to reverse the EURSEK chart, in any case.

NOK – EURNOK toying with the highs, having not yet taken out the high for the cycle yet – as we note above for SEK, the most supportive thing for NOK would be a stronger EUR

Upcoming Economic Calendar Highlights (all times GMT)

  • 1130 – ECB Meeting Minutes
  • 1230 – US Sep. CPI

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.