Trump teases with China trade deal talk

The market mood improved overnight after an ugly close on Wall Street when US President Trump suggested that a trade deal with China is possible. The content of his comments was rather thin and typical of Trump’s style: “I think we will make a great deal with China, and it has to be great because they’ve drained our country.” Nothing like an insult to butter up the other side at the negotiating table – oh wait, there are no negotiations at the moment. Elsewhere, Bloomberg ran an article suggesting that the US will implement tariffs on all Chinese imports  if Trump and Xi can’t make headway on a deal at the Argentina G20 in late November. 

All the while, USDCNY continues to pressure at the highs of the range as the market holds its breath. The very last thing that China will want to do is for the world to perceive in any way, shape or form that Donald J. Trump has twisted their arm and forced them to sign a deal that suggests any hint of a whiff of a loss of face. That’s just how hopeful I am that Mr. Trump’s off-hand comment bears any promise.

Germany’s Chancellor Angela Merkel announced that she would not run for party leadership this December and would not seek another term or any other political office at the 2021 German election. This after the Hesse election saw a sharp fall in the CDU’s results and where the nation’s two traditionally largest parties failed to clear 50% in the results – similar to the results in Bavaria. This is not a major catalyst for the short term, but when the political environment heats up over Italy’s budget and other existential concerns, it doesn’t help when the bloc’s largest economy has a lame-duck leader with no popular mandate. Germany does not have a tradition of snap elections, though they are theoretically possible and 2021 looks very far away indeed.

The Brazilian election quickly yielded to a buy the rumour, sell the fact dynamic as the BRL weakened sharply all day long yesterday after gapping higher at the open in the wake of Bolsonaro’s clear victory at the weekend. The tough work of dealing with high crime rates, social strife, an over-generous and regressive pension system and a struggling economy now begins. The easy part of any possible future BRL rally may be well behind us.

The Mexican peso plunged steeply yesterday in the wake of a referendum (only 1% participation!) that saw an expensive new Mexico City airport project rejected mid-construction. Incoming president Obrador said he would cancel the project based on the referendum result, claiming corruption hung over the project and promising to use the money for improving other airport facilities. The peso is weak on this as investors fear that Obrador could also step in and interfere with existing and future large energy projects after his predecessor opened up energy projects to foreign investment for the first time since 1938.

Chart: USD vs CNH and AUD

AUDUSD tried to rally again overnight on the “news” that Trump believes in the potential to sign a trade deal with China, but AUDUSD bulls will likely need support from the CNY, as it appears from the recent price action that the AUDUSD trade has become a proxy for China’s intentions for the renminbi. Here USDAUD is shown vs the gray-blue USDCNH for perspective.