7 minutes to read

Trump teases with China trade deal talk

John Hardy

Head of FX Strategy

Summary:  US markets closed in an ugly mood yesterday, with fresh lows for the cycle in major equity markets. But overnight, US President Trump bragged that he will make a “great” US-China trade deal.


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.
Enlarge
Source: Saxo Bank
USD – the US dollar is on its back foot suddenly after the recent run higher that faltered right at the range support level in EURUSD. The next key for the greenback is the jobs report tomorrow

EUR – the euro bouncing off the last change support near 1.1300, with the weekly close after the US jobs report as the next key test.

JPY – this is not an environment (improving risk appetite, bond yields picking back up) that favors JPY outperformance – next major test of USDJPY is tomorrow’s US jobs report and whether US yields pick back up sharply on a new  high for the cycle in earnings.

GBP – the UK bank access news is a breakthrough and the next step is the actual announcement of a Brexit summit, which is only likely if the two sides are moving toward an agreement. The sticky bit will be the terms and whether the deal is palatable to all Tories, and if not, whether a sufficiently large minority of Labour votes can be put together when Parliament votes. Bank of England Up later today – latest inflation data muted, but UK austerity is ending and BoE ready to hike if Brexit uncertainty lifts.

CHF – If a lid is kept on EU existential risks here and equity markets find their sea legs, a fresh rise in bond yields could make CHF one of the weakest currencies – or the weakest currency – in G10.

AUD – AUD is very bid across the board. If China is going to make a statement in defense of its currency ahead of the key Trump/Xi meeting at the end of this month, there is plenty of room for a squeeze on AUD shorts, even if our longer term concerns for the currency remain in place.

CAD – weaker link to Asian FX bounce overnight inspired by strong CNY and weak oil prices keeping CAD under pressure in relative terms, though USDCAD unlikely to escape a weaker US dollar if the latter can’t find a bid on the US jobs report tomorrow.

NZD – ditto AUD comments above, with the latest interest rate spread moves mildly favouring NZD even more than AUD.

SEK – a solid PMI this morning, but the general buoyancy in risk appetite and the strong bid in the smaller currencies a key driver here.
EURSEK suddenly staring down the range lows just below 10.30, which is also the 200-day moving average; we like it lower as long as risk appetite remains steady.

NOK – weak oil prices see underperformance versus SEK and new local lows in NOKSEK, but also constructive for potential lower in EURNOK on a longer-term valuation perspective.

Upcoming Economic Calendar Highlights (all times GMT)

• 0930 – UK Oct. Manufacturing PMI
• 1200 – UK Bank of England Inflation Report
• 1230 – US Q3 Unit Labor Costs and Nonfarm Productivity
• 1230 – US Weekly Initial Jobless Claims
• 1400 – US Oct. ISM Manufacturing

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