Morning Commentary: A Tenuous Truce

Foreign Exchange - Morning Commentary

A Tenuous Truce

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Chinse markets reopened last night after its long Lunar New Year holiday last week.  For the markets, two things have been in focus—trade and the level at which the PBoC set its USDCNY fixing.  On the latter point, the fixing was a bit higher than the markets expected, implying a possible change from the central bank as previously there has been a bias for the fix to be skewed towards the lower end of estimates.
 
With regards to trade, a US delegation has arrived in China for continuing talks.  The start of the week will most likely be characterized by low level meetings that set up talks involving USTR Lighhizer, Treasury Secretary Mnuchin and Chinese Vice Premier Liu He on Thursday and Friday.  Critically, a deal is highly unlikely without a meeting between President Trump and President Xi and currently a meeting is not scheduled before March 1st , when the current truce ends.  However, reports indicate that the president is willing to delay the escalation of tariffs should "sufficient" progress be made today which, more than anything, explains the market's relative benign reaction to the fast approaching deadline. 
 
According to recent surveys, over 80% of respondents expect some sort of extension to the ceasefire. While we do agree with this assessment, there still remains some uncertainty around the ultimate impact this will have on the markets.  An extension, while certainly better than tariffs rising to 25%, really just extends the uncertainty.  As a result, factors surrounding global trade will most likely not be supportive as exporters will still lack visibility towards the ultimate resolution. 
 
Beyond China, the trade truce with the EU is also approaching an inflection point with the Department of Commerce set to report the findings of its Section 232 investigation on autos by February 17th.  As a reminder to our readers, automotive trade key negotiating point as it represents a large portion of the trade deficit the US has with the EU.  Within the EU, Germany remains the largest automotive player making the Section 232 report especially important to them.  
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • It has been reported that PM May will reject Labour's compromise on a Customs Union, leaving Brexit talks to continue to muddle along.  However PM May did send a conciliatory letter to Labour's leadership in an effort to win more time to negotiate a withdrawal agreement.  On an economic front, Q4 GDP data disappointed, coming in at 0.2% verses expectations for 0.3% growth as business investment was hit by Brexit uncertainty. 
  • Talks seeking a resolution to the US government shutdown broke down over the weekend.  The legislative timetable suggests that a deal is needed by today in order to for both houses of Congress to vote on it before the deadline this Friday although another stop gap bill is possible. 
  • The USD continues to rally and is on its longest winning streak since 2016.
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