Modest risk rebound on partial delay of Huawei ban

Risk appetite bounced weakly in response, as this provides little clarity despite the marginal de-escalation.

After placing Huawei on the Entity List that requires special permission for any US company to sell their goods to the company, a swathe of US tech giants immediately announced a cessation of doing business with the company to comply with the rules. The sudden announcement overnight of temporary 90-day “exemptions” for Huawei overnight suggests that the US is making up policy as it goes along and not considering the consequences of its actions. 

On the one hand, the move suggests a de-escalation of the temperature – hence the modest bounce in risk appetite overnight. On the other hand, China has mobilised a robust and comprehensive defiant stance and may have decided that the Trump administration is too unreliable and that China is willing to tough things out until it is the US side that caves significantly on demands. (Given Trump’s obsession with the level of the stock market, although this is a risky game of chicken for both sides.) 

Signs that China may prefer to keep the relationship on ice include the drumming up of nationalist rhetoric in the popular press and Xi Jinping’s visit to a rare earth minerals miner yesterday, which many see as a possible hint that the next escalation could include a Chinese ban on exports to the US of rare earth minerals – key in many high tech and military applications. China supplies some 85% of global rare earth production.

In Australia, a speech from Reserve Bank of Australia governor Philip Lowe raised the odds of a June rate cut to a near certainty as he pointed to an inclination to cut. His speech included loud hints that he would like to see the government consider the opportunity to kick in with some Keynesian stimulus to offset downturn risks, given that funding will be cheap due to low rates:

"In the event that the unemployment rate does not move lower with current policy settings, there are a number of options," Dr Lowe said. These include: further monetary easing; additional fiscal support, including through spending on infrastructure; and structural policies that support firms expanding, investing and employing people. Relying on just one type of policy has limitations, so each of these is worth thinking about."

The Morrison-led coalition government has maintained a strict balanced budget stance and has even promised a strong surplus next year – a promise that will have to be broken if Australia is heading for a recession.  

Trading interest

Staying short AUDUSD for a look below the 0.6827 cycle lows from back in early 2016 and dropping stops to below 0.6950. 
Short EURUSD via short-date options near the money for a go at 1.1000 within a month.

Chart: AUDUSD

AUDUSD trying the recent lows and, the early January flash crash aside, is eyeing the lows from early 2016 below 0.6830 (lower dotted line on the chart) soon. Volatility remains incredibly constrained – likely by the assumed USDCNY cap – and the RBA has ticked about every dovish box it can tick here so further AUD downside would need other sources of fuel. The highest octane fuel would be a USDCNY move above 7.00, but barring that a fresh deterioration in risk appetite and iron ore prices are two candidates.