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The US and Chinese negotiators are continuing to discuss ahead of an implicit October 15th deadline when the next ratchet-up of US tariffs on China is scheduled. The 15th of October is coincidently also the soft deadline for the next US Treasury “currency manipulation” report. As explained further below, a seemingly likely revival of this past Spring’s US-China “currency pact” proposal suddenly makes this currency manipulation report a little more interesting and important.
More broadly at this point, a mini-trade deal feels increasingly likely and imminent, which might include a delay of tariff escalation exchanged for agricultural purchases and the aforementioned currency agreement, as a confidence building measure to allow a more comprehensive deal to be worked on in the coming months.
The Asian FX strategists reckon that this could catalyse a retracement of USDCNY towards 7.0. This could in-turn trigger broader a near-term partial retracement in anti-cyclical trends in FX seen during the tariff escalation over the past 6-months.
What might reinforce a near-term reversal of risk- bearish trends is the other set of negotiations around Brexit, ahead of the 19-October "Benn Act” deadline to request an extension from the EU, ahead of the otherwise hard 31-Oct deadline for the UK’s exit from the EU.
Without any better visibility on exactly how US-China trade might resolve at this point and still a lack of full resolution in the Brexit saga, the strategic views and macro portfolio remains for now biased for defensiveness, but with scaled back risk this week. This strategic approach has been more focused on the increasingly depressed sentiment, a collapse in business spending, and rising recessionary risks that has resulted from these unresolved political uncertainties, and the hurdle for the real economy to regain sufficient confidence to restart the capex cycle is likely far higher than the hurdle for financial markets to swing from fear to hope. So while a US-China mini-deal, and a viable withdrawal agreement to avoid a no-deal Brexit could drive a material tactical recovery in high-beta versus safe FX, a more considered reassessment of the strength of the feedthrough into the real economy would be warranted before the team’s defensive orientation undergoes a substantial shift.
At this juncture, we squared-off all spot positions stopped out short GBPJPY and GBPCHF and hold small residual defensive trades in AUDJPY, NZDJPY and EURNZD debit put spreads. Courtesy: JPM
