Deal Or No Deal For China? Answer will Set The FX Course

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup May 9, 2019

Investors are nervous that this time, President Trump is serious about raising tariffs on essentially all Chinese goods to 25%. With the Friday deadline looming, President Trump is still keeping the market guessing. In fact just Thursday morning, he said China cannot renegotiate the trade deal but a while later he announced that a “beautiful letter” was sent from President Xi and the two could speak on the phone. This puts the chance of a tariff delay back on the table and according to Trump, a “China deal this week is still possible.” , which hit a 3-month low in the early NY session when the tumbled more than 400 points, ended the day only slightly lower.

What’s interesting about Thursday’s moves is that the sold off alongside stocks. Typically, risk aversion is accompanied by a flight to quality into the greenback but on Thursday investors bailed out of all U.S. assets. Softer and a higher were partly to blame as the slowdown in PPI growth signals weaker consumer price growth on Friday. is the most important piece of U.S. data this week and while economists are looking for price pressures to accelerate due to higher gas prices, the risk is to the downside after PPI. If CPI growth slows, we could see renewed losses in . If they rise 0.4% or more, there will be a cautious relief rally.

But the ’s reaction will be limited ahead of the Friday midnight tariff deadline. Chances are, the decision to impose or delay the increase in tariffs will come after the market close. Trade talks resumed Thursday and will be followed by a dinner between Chinese Vice Premier Liu, U.S. Treasury Secretary Mnuchin and Trump’s top trade negotiator Lighthizer. There’s very little time to make a deal but the deadline could be delayed if Trump has a satisfactory conversation with President Xi. Last-minute back peddling would not be unusual. Friday will be a high anxiety day as investors wait for Trump’s decision and when it is made, there will be big, potentially sustainable moves in currencies. If the tariffs are hiked, we could see break 109 and hit .68 cents. If they are delayed, expect USD/JPY to hit 110.50 and AUD/USD to squeeze above 71 cents.

Meanwhile, keep an eye on , which could breakout of its 2-week long consolidation on Friday. are scheduled for release and a disappointing report could send the pair well above 1.35. Although economists are looking for stronger job growth, the Bank of Canada’s cautious outlook, the decline in the employment component of and the softer-than-expected are a sign of weakness in Canada’s economy. are falling but there’s been limited movement in USD/CAD. The labor-market report could be just the trigger for a break that would allow the Canadian dollar to follow other currencies lower.

broke to the upside hitting a high of 1.1250. Unfortunately it is not a convincing break because the pair retreated after Trump suggested that a deal is possible. There’s been a lot of two-way action in EUR/USD and the downtrend remains intact until we see the pair close firmly above its May high of 1.1265. will also be in play with scheduled for release. We are looking for stronger numbers because and activity improved in the first 3 months of the year. The pair is stabilizing above 1.30 and could squeeze to 1.31 if the data is good, but the sustainability of the move will hinge on risk appetite.

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