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

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.

Chart: EURUSD
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.