FX Update: Where to focus now that US-China trade deal delivered

The US-China trade deal has now been signed after yesterday’s ceremony at the White House and the 86 pages of the deal’s terms cover a fairly comprehensive extent of the US-China trade relationship, including sections on technology transfer and intellectual property theft as well as terms of conflict resolution. The sticking point that many have rightly focused on is the explicit purchases promised from the Chinese side in exchange for – remarkably few details on this – US tariff reductions. As a Bloomberg article points out, the advance of $200 billion would require a growth in US exports to China on the order of +56% and others have pointed out that specific product categories – especially energy exports like LNG and crude oil – would have to grow by several multiples. In short, the proof will be in how the actual export data shapes up, and already soybeans futures in the US seem to be showing skepticism with a sharp move lower yesterday on the lack of details on soy purchases and as China has said that it will buy according to demand.

Now that we are free of the US-China trade deal distraction and have to wait at least a monthly cycle or two for the signs of Chinese purchases to materialize, etc,  we see three primary distractions for equities and currencies – the Fed, the direction of US data, and developments in the US election. The chief risk in the near term from the Fed is that other Fed voters – particularly Powell himself – echoing the rhetoric from Fed voter Kaplan of the Dallas Fed, who was out yesterday suggesting that the Fed should be “sensitive” to elevated risk-asset valuations. As for US data, we still have our concerns, but more evidence needed in the January data cycle to put this one on the front burner.

Now, on to the US election, which will occupy increasing market bandwidth until early November: The US-China trade deal signing could mark at least a temporary “peak Trump” moment as oddsmakers are strongly tilting in favour of his re-election relative to the recent past. As well, the last debate ahead of the first of the Democratic primaries in Iowa on February 3, have many analysts wringing their hands on the weakness of the Democratic field on concern that whoever emerges could fail to excite voters. The chief problem for Democrats is the internal divide between moderates like Biden, seen as likely to reap some independent votes and centrists, the more left-leaning progressives, the party’s more impassioned base that want to raise tax the wealthy and shake up the system to extend benefits like health, education and higher pay to the young and poor, possibly scaring away higher earning centrists. Polling tendencies and primary results deserve close attention from here – already on March 3 we have “Super Tuesday”, with some of the largest US states holding their primaries on that date, including Texas and California, and represents a third of all delegate votes for the nomination.

Chart: EURCHF
We continue to focus on EURCHF, as the franc remains one of the few currencies on the move, pressing to strong new lows below 1.0800, possibly on the US early this week placing Switzerland back on its watchlist of currency manipulators, suggesting that the SNB will have far less leeway to intervene if we are facing a re-rating of the exchange rate here. Note as well that USDCHF has punched down to a new cycle low below 2019 lows today.