FxWirePro: Lingering trade tensions induce FX wariness but never blow out of proportion

The US-China trade tensions escalated dramatically, but the baseline remains a forthcoming renegotiation of the US-China relationship, now just with much higher stakes. Perhaps for this reason, FX has become desensitized as negotiations will take time.

This week’s focus is China’s President Xi Jinping’s keynote speech at Bo’ao Forum for Asia (BFA), a Chinese government-hosted version of Davos. In his most anticipated speech, Mr. Xi is likely to outline China’s economic policies over the next decade and more importantly roll out new opening up measures.

While China’s Ministry of Commerce stated that “there was no talk between China and US” and committed to “fight to the end” if the trade war escalates, President Trump’s Twitter over the weekend fuelled market expectations that China will eventually make trade concessions. “President Xi and I will always be friends, no matter what happens with our dispute on trade,” Trump wrote on Twitter. “China will take down its Trade Barriers because it is the right thing to do. Taxes will become Reciprocal & a deal will be made on Intellectual Property. Great future for both countries!” It sounds like a deal has already been made.

However, the market response so far is quite muted, as everyone knows that the talk is cheap.

Finally, we note the recent surprising FX reserve allocation data, but warn not to over-read seeming indications of JPY demand and to be patient about official sector rotation back into EUR.

FX vols have been perplexingly soft over the past two weeks in the face of escalating trade war rhetoric and jitters in equity markets. Back-end USDJPY vols have not responded to the uptick in interest rate volatility and the breakdown in rates/FX correlations this year.

FxWirePro launches Absolute Return Managed Program. For more details, visit: 

http://www.fxwirepro.com/invest