- Positive surprise the EU PMI data has brightened the mood of the EUR bills again
- Sharp sell-off in gold had abated
- Oil traders ignore the inventory data, but worry about tariff rollback
- Phase one priced in
Asian Wrap
When and where will the 'Phase One' US-China trade deal be signed remains a mystery. One thing that for sure is that President Trump will want a substantial signing ceremony.
Hu Xijin, editor-in-chief of China's Global Times, poured some cold water on the talk of a US-China trade agreement. In a tweet, he said Beijing will "insist that the US proportionally remove existing additional tariffs simultaneously with China." He seemed to describe the Financial Times article as "illogical". "My understanding is that for reaching phase one deal, the two sides must proportionally, simultaneously remove the additional tariffs imposed since the trade war. The new tariff threat is not a bargaining chip".
The market consensus has been that the 'Phase One' US-China deal was fully priced. However, the latest news flow suggests that China is pushing for further concessions from the US; i.e. cancellation of earlier tariffs. Some traders think this is the Chinese taking advantage of US President Trump, who announced the deal too soon and is now under pressure to deliver. The market seems to agree and believes that China will be rewarded in squeezing out a better deal. But In any case, risk-on rolls on.
The market has taken an overly optimistic view on the Phase One deal, nudged on by better US economic data of late. So, with delay comes chance that risk-on sentiment has too long to ferment, stalls and then maybe reverses as the waiting game weighs.
But the general take from this morning session is that going forward macro prints will be the key drivers with a Phase One trade deal between the US and China now priced in, but there's a clear reinflation theme taking hold.
Commodities
Gold
Yesterday sharp sell-off in gold had abated as profit-taking and consolidation took hold in Asia markets
Today's ASEAN flows have been better bid, but I suspect this is more about a defensive positioning as opposed to an offensive trading strategy on the chance trade talks to go sideways.
Oil
Oil has struggled to gain traction in Asia after the bearish to consensus crude build reported by the American Petroleum Institute and as trade talk momentum hits a pause. But I think the market is less concerned about the inventory data since it's not at any dangerous levels and following seasonal patterns. But are deeply worried if there is a failure to roll back tariffs, which could likely prompt a significant bearish shift in sentiment.
China continues to test President Trumps resolve to push for a reverse in US tariffs before signing a deal. While I believe Trump wants the political trade deal to win, I’m not so sure how keen he is to bridge the trust gap and commit to a rollback before an enforcement mechanism is in place
Currency Markets
The BoT cut its repo rate by 25bp to 1.25% earlier and announced measures aimed at weakening the baht. I don't see the standards as having a meaningful impact in the long term, and price action in USD/THB has been telling: the initial move post-BoT was from 30.25 to 30.40, before its cam back to 30.31, with flows all LHS. I expect the baht will likely continue to shine like a star and look to reinstate dollar shorts.
USD/CNH fell and tested yesterday's low but found support there. The pair has since consolidated. The yuan will continue to march to the beat of the trade talk headlines.
There been some mild short USDAsia covering today but with the trade talk momentum still resonating the topside will probably be capped despite the improving US dollar tone across G-10.
Asia G-10 traders sat on their hand all day, and there was little carry over from the US session as trade talk euphoria took a pause. But overnight the US dollar moved on back of fixed income, with USTs under pressure as the market priced out further Fed cuts on the back of reports of constructive US-China trade talks. The US dollar remains bid as EUR/USD positions get abandoned in the face of rising US bond yields.
But the positive surprise the EU PMI data has brightened the mood of the EUR bills again but with signs of investors moving back into the US dollar carry where the dollar is King, look for the EUR sentiment to get challenged on any moves back to 1.1100
USD/JPY closed above its 200-day moving average in New York on Tuesday but lacked follow-through in slow Asia, trading as the markets consolidate on the back of some profit-taking as the pairs have traded better offered.