New Trade Truce Fails to Impress FX
Daily FX Market Roundup 12.16.19
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
With the December 15th tariff deadline in the rearview mirror, investors breathed a collective sigh of relief today. Equities extended their gains and Treasury yields increased. However given the significance of recent developments, the moves were modest and currencies were mixed which means the deal failed to impress. USD/JPY ended the day higher but AUD/USD and NZD/USD were flat.
The problem is that the Phase one trade agreement is more of a trade truce than a trade deal. China agreed to buy USD$200B in additional goods and services over the next 2 years and make a number of structural reforms. In return, the US will not only forgo imposing another round of tariffs but roll back tariffs on certain Chinese goods. Trump described the deal as amazing but the Chinese were far less excited. Considering the significance of tariff rollbacks, if the agreement is as amazing as Trump touts, the Chinese would have declare victory as well. However like past verbal agreements, there are details that still need to be worked out and according to Treasury Secretary Mnuchin, Phase two of the trade deal could come in stages as well which is the crux of the problem. Not only do investors fear that this part deal is reversible but Phase two could be another tough battle. Regardless, USD/JPY is being driven higher by the near term alleviation of r political risks in the US and abroad. With that said, we believe that the risk is still to the downside for the greenback after the Fed’s cautious outlook, softer retail sales report and today’s decline in the Empire State manufacturing survey. Housing starts and building permits are scheduled for release tomorrow and we expect housing data to be supported by low interest rates.
Meanwhile euro and sterling were completely unfazed by weaker PMIs. For the Eurozone, stronger service activity helped to offset weakness in manufacturing. While the data suggests that the manufacturing sector could still be in recession, between ECB President Lagarde’s optimism and the uptick in services, brighter times lie ahead for the euro. The same is true for the UK. Manufacturing, service and construction activity slowed but the data doesn’t incorporate the alleviation of Brexit uncertainty. UK labor market numbers are scheduled for release on Tuesday and softer numbers are expected after the manufacturing sector reported major job losses. Technically GBP/USD is due for a pullback but the uptrend remains intact as long as the pair holds above 1.30.
The Canadian dollar extended its gains while the Australian and New Zealand dollars consolidated. Stronger Chinese PMIs prevented steeper losses for AUD, which was restrained by the Treasury’s weaker budget projections and growth forecasts. Both currencies should be trading higher after the trade agreement and their weakness is particularly concerning.