Morning Commentary: Houston, We have contact

Foreign Exchange - Morning Commentary

Houston, We have contact

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Analyst
Trade talks between the US and China, the two largest economies in the world, kicked off this week.  These talks are the first face to face contact between the two countries since the leaders of both nations agreed to a temporary trade war ceasefire at the G20 summit in Argentina last November.   
Initially, these talks were expected to be low level, laying the ground work for more senior level discussions expected later this month when President Trump and Chinese Vice President Wang Qishan are expected to meet at the World Economic Forum in Davos, Switzerland.  However the low level talks received a boost when Chinese Vice Premier Liu He unexpectedly attended the meeting. 
While it is unclear as to the extent of Liu involvement in the talks, he is President Xi's top economic advisor and his presence at a low level meeting signals how important these trade talks are.  While stock markets around the world have staged a bit of a recovery recently and last week's US employment number was strong, equity markets around the world are still sharply off their highs and concerns remain over a global economic slowdown, making these talks important globally.      
While this latest round of talks have started off on an optimistic footing and both sides are under increasing pressure to strike a deal, it warrants mentioning that a quick resolution is unlikely as the issues between the countries are complex and involve issues critical to both countries' economic futures.  Key issues include intellectual property theft, 5G technology, and China's push to transform itself into an advanced manufacturing leader through state-led intervention that the US sees as violating World Trade Organization rules.  If both sides are unable to reach an agreement, retaliatory tariffs are expected to resume again in March.  
  • In China, the PBoC announced another reserve requirement ratio (RRR) cut last Friday.  This is the fifth RRR cut since September 2017 as the Chinese government steps up efforts to shore up a softening economy and inject liquidity in the markets ahead of the Lunar New Year.  Chinese officials have sent signals indicating a willingness to step up the intensity of easing and the RRR remains relatively high, leaving scope for further RRR cuts this year. 
  • In the UK, Parliament returns from its recess and with little to no progress being made.  With debate over PM May's Brexit bill expected to restart this week, expect news flow from this to dominate the GBP's movement with the prospect of the bill passing the same as when PM May postponed the first scheduled vote in December, implying that the GBP is already price for a rejection of the deal.  It has been reported that the meaningful vote is now scheduled for January 15. 
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