Benign US inflation outlook caps upside room for 10-year UST yield and USD/JPY amid uncertainty around US-China trade talks, says Scotiabank

A benign inflation outlook in the United States has capped upside room for the 10-year UST yield and USD/JPY amid uncertainty surrounding the 11th round of the US-China trade talks in Washington, according to the latest research report from Scotiabank.

China’s currency, stocks and government bond yields all dropped on Monday in response to US President Donald Trump’s tariff threat. It appears China is managing to ease market concerns as the nation’s media have been mute after US President Trump tweeted his tariff threat on Sunday.

According to The WSJ, US Trade Representative Robert Lighthizer told reporters in Washington on Monday that USD200 billion in Chinese goods will face higher tariffs starting Friday.

He added that "Over the course of the last week or so, we’ve seen an erosion in commitments by China, I would say retreating from commitments that have already been made, in our judgment."

US Treasury Secretary Steven Mnuchin also said that the talks went "substantially backward" over the weekend. Lighthizer and Mnuchin made it clear there are deep concerns about the direction of the talks, the report added.

SCMP reported that Chinese officials told their US counterparts they would not agree to a trade deal that required revisions to Chinese law that China had previously agreed to as part of the deal. The law change has major implications for provisions of the pact aimed at ending a Chinese practice of forcing US companies seeking to do business in the country to reveal proprietary technologies and other intellectual property.

"We would like to sell USD/CNH at 6.80 now with a target of 6.70 and a stop of 6.85 on hopes for a positive result. We will unwind short USD/CNH position if Chinese Vice Premier Liu He decides not to attend this round of negotiations as it could indicate no trade deal to be reached this time," Scotiabank further commented in the report.