Dollar Rallies but No One is Betting on a China Deal Just Yet
As China's delegation arrives in the US for trade talks, the greenback extended its gains against all of the major currencies. This is the largest and broadest team that China has sent in the 13 rounds of trade negotiations since 2018. Investors saw this as a strong commitment on behalf of the Chinese to secure a deal before they return to Beijing. But don't bet on a China deal just yet because on the very same day that Chinese officials land in the US, the Trump Administration blacklisted 28 Chinese firms for human rights violations and banned visas for Chinese officials linked to the mass detention of Muslims in the Xinjiang province. According to the US Director of Trade, Peter Navarro these are unrelated issues but the timing adds to the tensions between these two nations and complicates negotiations. Currency traders expect a trade break though this week but US actions suggest that the Trump Administration is playing hard-ball.
The sell-off in stocks and Treasury yields is a sign that equity and bond traders are not convinced that a deal (partial or whole) can be done. The size of China's delegation reflects their seriousness and commitment. While Trump previously said they are close to an agreement, the unpredictability of the US President leaves the dollar subjected to headline risk. Right now, we're waiting on Trump to confirm that a deal is very close which extend the dollar's gains but actions speak louder than words so the longer he waits, the greater the risk for the dollar.
The talk of purchasing Treasury bills is also negative for the US dollar. According to Federal Reserve Chairman Powell, the central bank is contemplating the possibility of taking these steps to grow the balance sheet for reserve management. While he said this is not QE, it is hard to interpret otherwise because the goal is to support the economy. His comments in general were more pessimistic than last week as he acknowledged that job growth is slowing and global developments pose a risk to the US' outlook. Tomorrow's FOMC minutes shouldn't hurt the dollar but stayed tuned for possible Chinese retaliation.
The Australian and New Zealand dollars remain under pressure as traders try to make sense of these conflicting headlines. Chinese data was better than expected with the Caixin manufacturing index rising. In Australia, business confidence fell but business conditions improved. USD/CAD held onto its gains despite stronger housing data.
Euro and sterling fell hard. German industrial production numbers were better than expected but with each passing day, the risk of a no deal Brexit increases. Apparently talks between UK PM Boris Johnson and German Chancellor Merkel hit a dead end. A deal based on the UK's latest proposals is highly unlikely and "nearly impossible" according to sources." Tensions are high with European Council President Donald Tusk accusing the UK of playing a blame game and putting the future of Europe and UK at stake on twitter. This public antagonism is a sign that negotiations are not going well. Unless Johnson proceeds with a request to delay Brexit, the next stop for GBP/USD could be 1.20.
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