In FX – Cautious Back and Forth Ahead of Trump/Xi

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Market Drivers June 28, 2019
Majors mark time
EZ core CPI bit hotter
Nikkei-0.29% Dax 0.44%
UST 10Y 2.02%
Oil $59/bbl
Gold $1413/oz.

Europe and Asia:
EZ Core CPY 1.1% vs. 1.0%

North America:
CAD GDP 8:30
USD Personal Income/Spending
USD Revised UOM

It’s been a quiet night of trade with majors moving up and down in narrow ranges in an aimless back and forth dance as markets awaited the much-anticipated meeting between Presidents Trump and Xi.

At this point, sentiment has skewed towards some positive resolution – at the very least a truce on any further tariff impositions – so that if talks yield nothing, the FX markets are likely to open up gap down on Monday in Auckland.

Neither party has offered any hints at the state of negotiations in the past 12 hours, so FX has been in an essential standstill as traders refuse to assume risk on either side. As we noted earlier, Trump would love to produce some of an agreement in order to win political gains. As with any part of Trump policy, the actual details would not matter as long the optics looked favorable and provided him with momentum for the 2020 election.

The default assumption is that it is the Chinese who will be much more stubborn at the negotiating table with President Xi loathe to lose face no matter how painful the economic consequences for China might be. President Xi certainly has much greater control of power than Donald Trump and does not face election risk, but his power may not be absolute. The market assumption is that Chinese people will be willing to suffer economically for patriotism, but this is a very different China than one of the Cultural Revolution. Thirty years of state-sanctioned capitalism have created massive wealth expectations in the populace and if those expectations are threatened by the country’s first serious growth recession since the start of the experiment, Xi may face much tougher pressure than most market players realize.

Both parties, therefore, are motivated for some sort of rapprochement and will likely put a positive spin on the talks even if not much substantive progress is made. The opposite of such a scenario with recriminations and threats of further punitive measures could trigger a massive selloff capital market already facing a serious stagnation in global growth. For now, USDJPY holds at the equilibrium of 107.50 but Osaka proves a disappointment fresh lows could be in view on Monday.

Boris Schlossberg
Managing Director

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