FX Update: Muted reaction in FX to US-China trade deal

The US-China Phase One trade deal, on paper, appears far more comprehensive than many expected, but the headline numbers that China has purportedly promised look difficult to achieve, including $50 billion in agricultural imports from the US (the highest in recent years was a mere $20 billion in 2017) and the increase in goods and services imports of an additional $200 billion above current levels. That is the conclusion in our Saxo Market Call podcast discussion this morning. For perspective on that last number, US goods exports to China totaled $133 billion and US services exports to all destinations totaled $828 billion in 2018, a bit over half of which are travel and financial services.

Besides requirements around Chinese purchases of US goods, the deal includes sections on intellectual property theft, forced technology transfers, currency policy, opening of Chinese markets and more. A dispute-resolution framework is a part of the agreement, in which a US-China working group would get together to resolve disputes and if unable to do so, would be referred to the governments, who could then choose to pass new tariffs. 

The proof from here will be in the truth on the ground and how these numbers start adding up in coming months. The Trump administration may prove reluctant to complain if progress is slow as this could take the edge off the stock market’s rally into the 2020 election. And a cynic might argue that this deal was China’s way to punt the trade issue for now to avoid immediate further pressure on its economy and financial system while steering clear of the US-China relationship becoming a political focus in the US heading into the 2020 election. A few high profile deals and a solid acceleration in purchases of key commodities from the US are the only price for the time bought.

The Euro Zone flash PMI for December out this morning were little cause for holiday cheer, as the German Manufacturing reading headed in the wrong direction from already very low levels, posting a 43.4 vs. the 44.1 in November. Remember that the nature of these surveys means that things must continue to get worse to maintain readings below 50. The France Manufacturing reading, meanwhile, dipped to 50.3 from 51.7 in November, and the broader Euro Zone flash reading number was an ugly 45.9 vs. 46.9 in November. On top of this, beware of the risk of a US-EU trade spat brewing.

Besides the follow-on reaction to the US-China trade deal, we are watching how the situation in US money markets shapes up over year-end and into the New Year as Trump deficits will continue to add pressure on the Fed to expand its balance sheet without end – when does it recognize that fact and make it  transparent to the public?

Chart: AUDUSD
One of the more confusing reactions in the market was in AUD on Friday, as the initial celebration around the conclusion of the US-China trade deal failed to sustain a bid in AUDUSD and the pair ended the week with a bearish reversal candlestick, so far rejecting the attempt higher. A fresh rally and close back above 0.6900 is needed in the next couple of sessions for this pair to fit the narrative across other markets – especially EM currencies and equities that have celebrated the conclusion of this trade deal. Until then, we have a bearish reversal on our hands with further confirmation that the chart is capped for now if we dip through 0.6825-00.