U.S. Dollar Supported by Claims Tariffs on China will Soon Come Down  

© GovernmentZA, image Reproduced Under CC Licensing

- USD advances after WSJ reports tariffs on China could come down. 

- Trump-Xi headed for end-March summit to sign a trade peace deal.

- ING says USD to remain bid either way, U.S. currency in sweet spot.

The Dollar was boosted Monday after The Wall Street Journal reported that negotiators are close to finalising a trade deal that could see White House tariffs removed from Chinese goods exported to the U.S., which suported the greenback and prompted a fresh bid for so-called risk assets. 

The Wall Street Journal says a formal agreement could be signed at a March 27 summit between Presidents Donald Trump and Xi Jingping, although the paper qualified this with a warning stating that "hurdles remain, and each side faces possible resistance at home" due to perceptions on both sides that the terms of the agreement are too favourable for the opposite party. 

"A potential US-China trade deal looks to be in advanced stages and shaping up more positively than what market expectations had seemed to indicate previously," says Fritz Louw, a currency analyst at MUFG. "A deal in which not only are further tariffs avoided, but existing tariffs scaled back, could provide a bullish boost."

MUFG says a deal that ends the trade war would probably be bad for the U.S. Dollar and good for other currencies if it happens. But they also say the Dollar could benefit if the talks fall apart because that would lead financial markets to speculate that a further slowdown in the global economy is not far off. 

Above: Pound-to-Dollar rate shown at daily intervals.

One avenue through which talks could find themselves turning acrimonious is a fallout over the mechanism that will be used to enforce terms of the deal. Independent arbitration panels are a key feature of most trade deals but little has been said on whether there will be one for the U.S.-China accord. 

The Wall Street Journal says some U.S.-based "China hawks" are concerned that any proposed mechanism would be one that just ties U.S. companies into years of talks and negotiations without much action ever being taken. 

"If this key issue remains unresolved, it could torpedo much of the progress made thus far," says Louw. "This would stoke existing concerns about a trade-driven growth slowdown, and drive demand from riskier assets into the dollar."

This is not the first time the WSJ has claimed that a trade deal is close although the report is in line with what President Trump has said on the subject in recent days and markets are taking it seriously enough.

The FX strategy team at ING Group wrote to clients on Monday explaining what the breakthrough could mean for currencies from their perspective. They say that whatever happens with the talks from here, the outcome is likely to be positive for the Dollar and bad for many other currencies.  

"The eventual resolution of the trade despite should provide the Fed with the room to hike interest rates in Q3 this year (which is not priced in)," says Petr Krpata, a bond and currency strategist at ING. "Even if the risk environment continues improving, USD should stay supported against low yielders such as EUR and JPY. Particularly for USD/JPY we see more upside ahead given the mix of rising stock markets and scope for higher UST yields"

ING's view appears to be that an end to the trade war would provide the global and U.S. economies enough breathing room to enable the Fed to hike its interest rate again this year, thereby supporting the Dollar, but the greenback would also gain if the talks fall apart because it is a safe-haven asset. 

This leaves the Dollar in a bit of a sweet spot that could ultimately see it remain bid for a while yet, regardless of what happens with China.

Above: U.S. Dollar Index shown at daily intervals.

The White House imposed tariffs ranging from 10% to 25% on around $250 bn of Chinese products exported to the U.S. each year back in 2018, in retaliation for "unfair trade practices" that it wants China to end. Talks have focused on intellectual property protection and state subsidisation of private industries. 

China has so-far agreed to buy more U.S. agricultural products in an effort to bring down the bilateral trade deficit and there has been talk about a possible pledge not to devalue its currency at any point. However, little has been said about what protections U.S. firms will get for their intellectual property and whether the subsidies will end. 

So far the tariff fight between the world's two largest economies has led to a slowdown in both the U.S. and China as well as further afield including in the Eurozone. That global economic softening has derailed the Federal Reserve from its interest rate hiking cycle and ensured that central banks elsewhere remain sidelined. 

"The US and China seem to be inching towards an agreement on trade. But while the dampening down of trade tensions between the world's two largest economies would clearly be a positive development, it is unlikely to provide much of a boost to global growth this year. Meanwhile, it seems that most of the good news on trade is now priced into asset markets," says Neil Shearing, chief economist at Capital Economics.

The European Central Bank (ECB) will, on Thursday, adjust its economic forecasts for 2019 following the latest data and potentiall set out details of any measures it intends to implement in order to support the Eurozone economy this year as it grapples with after effects of the trade war and political headwinds. 

Trade skirmishes between the U.S. and China, as well as homemade headwinds like Brexit and the looming European Union parliament elections, continue to dent the Euro and Eurozone economic growth.

"The Huawei issue still signals serious US-China and Chinese-Canadian tensions, and markets should focus on that rather than the noise of the nth iteration of a Panglossian WSJ trade article. Moreover, Huawei also signals serious US-EU tensions that markets had better wake up to," says Michael Every, a strategist at Rabobank. 

Above: Euro-to-Dollar rate shown at daily intervals. 

The Dollar was quoted broadly higher on Monday, while the only G10 currencies to eke out a gain over the U.S. unit were Pound Sterling and the Australian as well as New Zealand Dollars. 

The Dollar index was 0.20% higher at 96.58 during the morning session Monday and has now gained 0.56% thus far in 2019. The Pound-to-Dollar rate was 0.36% higher at 1.3242 and is up 3.94% for 2019 while the Euro-to-Dollar rate was -0.19% lower at 1.1342 and has declined -1.07% this year. 

Stock markets closed higher in Asia after a bouyant overnight session, while most European indices were quoted above their Friday closing levels during the morning on Monday. Oil prices were also higher, while yields U.S. and German 10-year yields were lower.  

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement