Over the past few weeks, a steady trickle of headlines suggest the US-China trade talks are deteriorating. If we rewind a few weeks, the passage of a bill to express solidarity with Hong Kong protestors was denounced by China’s state representatives as unwarranted interference in Chinese domestic politics. Even so, it was seemingly kept separate from trade negotiations which appeared to be moving towards a conclusion.
The message over the weekend was different in both delivery and tone. Bloomberg reports: ‘In the first direct protest to an American official, top Chinese diplomat Yang Jiechi told US Secretary of State Michael Pompeo that bills regarding Hong Kong and Xinjiang are gross violations of China’s domestic affairs.’ Also over the weekend, Chinese state official’s announced plans to remove foreign computer gear over a three-year time frame. This new tac closely mirrors the US’ scrutiny of China’s own Huawei, which the US sanctioned, but was intended to be part of the détente heading into phase one. This reversal of stance implies the Chinese hold a greatly diminished view of forward progress on trade.
Bottom line: It seems unlikely this is all political posturing as we head into a trade deal. Donald Trump’s comments last week—that it is perhaps better if the trade deal waits until after the election—suggest this is likely a permanent break between Chinese and US positions. Over the past weeks, the market has reflected more optimistic pricing of trade in 2020, which now seems overcooked. Part of the reason we have witnessed a pullback in the Dollar over the past week is a reflection of this dynamic and rebalancing of expectations based on this new 2020 outlook.
There was some good two-way price action for the pair on Friday following a positive Non-Farm Payrolls report out of the US. The Dollar strengthened against the Pound as the pair fell to a low of 1.3101 after starting the day around the 1.3150 level. Sterling staged a recovery over the weekend and into this morning as all forecasts point toward a Tory majority at this week’s election.
The Pound’s trade-weighted Index fell in early trading on Friday, bringing the pair briefly to a low of 1.1810. After bouncing off resistance at this level, it’s been one-way traffic higher for the pair, reaching a two-and-a-half-year high above the 1.19 handle this morning. Weakness for the common currency against its peers has exacerbated this move, and we’ll be keen to see whether this Euro weakness continues in the run-up to the ECB monetary policy meeting later this week.
As previously mentioned, positive US labour data on Friday led to a sharp rise in the Dollar’s trade-weighted Index. The pair had previously threatened to break out of its recent trading range and move higher through the 1.11’s, but this latest move has brought it firmly back into familiar territory, currently trading in the mid 1.10’s interbank level. We’ll be watching developments from the US-China trade negotiations this week as December 15th is the deadline for the US to enforce new tariffs on China, while Beijing has instructed Chinese companies to reduce reliance on US computer equipment.