The U.S. and China are finally putting the ink to the long and tedious trade discussions that started just after President Trump was elected.
Phase One of the deal is expected to be signed in Washington around the lunch hour EST. That is also when the details of the agreement will be released. Various media reports claim "sources" say China is committed to making $200 billion additional purchases of U.S. goods. That includes around $40 billion in agricultural products.
However, the actual dollar amount of purchases in various categories will not be made public. The deal does not include the repeal of existing U.S. tariffs on Chinese imports. Some tariffs will be reduced, but Treasury Secretary Steven Mnuchin said the rest would remain until the Phase Two deal is completed. Nevertheless, Trump can claim victory. China caved in to his demands and are still stuck with punitive tariffs.
FX traders are not euphoric about the news. The commodity currency bloc, including the Canadian dollar, drifted lower or consolidated losses overnight. The Australian dollar suffered the worst. AUD/USD peaked at $0.7027 at year-end due to a combination of year-end demand and positive sentiment surrounding the upcoming trade deal. That sentiment soured, and prices dropped to $0.6850 by January 10. Prices rebounded but couldn’t get above resistance at $0.6920 when details of the proposed Phase One deal started leaking out.
Asia FX markets were subdued ahead of today’s Trade deal signing. USD/JPY traded in a narrow 109.82-110.00 range. The currency pair garnered slight support from hopes of a risk rally when the trade agreement details were released, but soft treasury yields undermined that support. Moreover, 10-year U.S. Treasury yields have dropped from 1.88% to 1.79% in the past week.
Once again, it was the British pound that injected life into European markets. Another Bank of England policymaker, Michael Saunders, waxed dovishly about monetary policy. He said "It probably will be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further, to reduce risks of a sustained undershoot of the 2% inflation target. With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present."
His comments weren’t anything traders hadn’t heard recently, but GBP/USD wobbled, nevertheless. Mr Saunders views were validated after a slew of UK economic reports were released and they were weaker than expected. UK inflation rose just 1.3% y/y in December compared to the forecast for a 1.5% gain. Producer Price and Retail Price indexes also missed estimates. GBP/USD dropped to $1.2986 from $1.3041 following the reports but recovered to $1.3005 in Toronto trading.
The Canadian dollar will trade sideways until the Phase One agreement details are released.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
