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From the Floor: EM, China feeling the heat
#SaxoStrats
03 August 2018 at 7:31 GMT
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From the Floor: Trump ups the trade war ante
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01 August 2018 at 8:00 GMT
Video / 10 April 2017 at 7:20 GMT

From the Floor: Trump, Xi retreat from trade war stance — #SaxoStrats

#SaxoStrats
   • Trump, Xi agree to 100-day action plan on US trade deficit with China
   • US deploys aircraft carrier to Korean coast as geopolitical tensions rise
   • Mixed nonfarm payrolls report sees US yields, USD survive key test
   • Household survey came in very strong even as headline fell short
   • AUDUSD breaking down on weak rate outlook, iron ore selloff
   • ECB to release first post-taper bonds buying data today
   • Fed chair Janet Yellen speaking at 2000 GMT

SaxoStrats
By Michael McKenna

Geopolitical tensions may be rising sharply and unpredictably, but their merely political counterparts have eased for the time being, at least insofar as the US and China are concerned.

In the wake of the summit between presidents Trump and Xi, it appears that Washington and Beijing have emerged with a “100-day plan” intended to allow the US to work on its trade deficit with China. Xi’s government also offered the US better market access for financial sector investments and US beef exports – two relatively simple concessions for Beijing – in an effort to avoid a trade war between the world’s two largest economies.

Emerging from the meeting, Trump tweeted that “goodwill and friendship was formed […] but only time will tell on trade.”

One interesting signal came after Xi left the US, when China’s state-run Xinhua news agency mocked Trump’s controversial attack on a Syrian air base by saying that the strike was “the act of a weakened politician who needed to flex his muscles”.

This morning sees the US sending an aircraft carrier group to Korean coastal waters in an apparent effort to rein in the bellicosity of North Korean leader Kim il-Sung in the wake of his own missile launch last week. The news, combined with the US’ will-they-or-won’t-they regime change issues in Syria, has risk appetite cautious at best into Monday’s session.

Reporting from Saxo’s Singapore trading desk, Tareck Horchani tells us that the Trump/Xi summit produced no consensus on North Korea, while noting that mainland Chinese equities have opened the week in the red with Shanghai down 0.53% and Shenzhen 0.99% lower.

According to Horchani, the US dollar gained against virtually every Asian currency overnight, which Saxo Bank head of forex strategy John J Hardy sees as the greenback having survived a “key test”.

“Friday’s nonfarm payrolls headline was very weak,” says Hardy, adding that this was counterbalanced to a degree by a strong household survey component and by the Federal Reserve’s William Dudley minimising the impact of Fed balance sheet reduction – something that had spooked dollar traders last week.

“We see USDJPY higher,” says Hardy, “and AUDUSD is breaking down as well on a weak rate hike outlook and the ongoing selloff in iron ore”.

USDJPY
Source: Saxo Bank 

Concerning the latter pair, Hardy says that the break below 0.75 is technically interesting.
In bond markets, we are also seeing a recovery as 10-year US Treasury yields rebound from the key 2.3% area reached last week.

“The reaction to Friday’s nonfarm payrolls print dominates fixed income markets into Monday’s open,” says Saxo bond trader Michael Boye; “despite the headline disappointment, we are seeing government bonds sell off today”.

Boye also reports that the European Central Bank will be releasing its first suite of post-taper bond buying data today. According to the Saxo fixed income trader, the ECB’s CSPP number will be crucial for bond market sentiment as the latest release (the number tracks the daily volume of corporate bond buys) will include three days of settled transactions post- the ECB’s April 1 taper of its bond buying activities.

The average daily volume has generally sat around $365 million of late, so Boye says that “anything above $300 million” post-taper will be bullish for fixed income.

Elsewhere in central banks, we have Janet Yellen out at 2000 GMT today. Yellen’s address is a university speech, but there will be a Q&A so some policy hints may be forthcoming this evening. 
 
US carrier group heads for Korean coast

















Washington has sent a carrier group to Korean waters today. Photo: Shutterstock

Michael McKenna is an editor at Saxo Bank

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