G20 stumbles, China will be the long term beneficiary
(Peter Rosenstreich, head of market strategy)
The stakes on risk to global trade have risen on the back of the G20’s failure to reject rising protectionism. In a surprise twist, the G20 published a communiqué removing the wording: “resist all forms of protectionism” - highlighting the diverse group's ineffectiveness to work together to form a compromise. In a complete role reversal, US Secretary Mnuchin refused to cull protectionism, while China's President Xi was vocal in supporting free trade. The compromised statements included commitment to “strengthening the contribution of trade to our economies”. The effect on markets was muted however, the risk of destabilising US trade policy has increased. Trump’s administration has been preoccupied with domestic policy failures, forcing international issues to the side. US Secretary of State Tillerson was in China to ease bilateral tensions. However, key issues such as North Korea, FX policy concerns and trade were not discussed.
Trump's next move on currency & trade policy is anyone’s guess. Instead of delivering on his campaign promise to label China a currency manipulator and slap a massive tariff on Chinese’s imports from “day one”, Trump has only targeted China for cheap political points. We suspect that Trump is bluffing in regards to an aggressive Chinese policy, yet the risk of radical unilateral action cannot be ruled out. In the long run, we suspect that the biggest gainer from Trump's non-traditional actions (unstable political partner & withdrawal from Trans-Pacific Partnership etc ) will be China, gaining total dominance in the Asian region. In this regard, we continue to value China assets. USDCNY remains stable around 6.90, on a slightly weaker fix at 6.89.
USD sell-off ahead of busy week for Fed members
(Arnaud Masset, market analyst)
The USD started the week on the back foot against the backdrop of easing US yields and growing investor impatience over Trump’s tax cut and fiscal stimulus reforms. High-yielding currencies were buoyed this morning as the low volatility environment encouraged investors to load on risk. In the G10 complex, the Aussie and the Kiwi were the best performers, rising 0.44% and 0.63% respectively. The Japanese yen consolidated last week’s gains but did not rise further as market participants resumed the “hunt for yield”.
The single currency continues to gain ground despite the uncertainty stemming from ongoing French elections. It seems now that the market is already pricing in a defeat from Marine Le Pen or at least indicating that it will not jeopardise the future of the eurozone. The spread between German and French two-year yields continues to narrow. After reaching 0.45%, the spread narrowed to 0.33% as German yields recovered.
After an uneventful G20 meeting in Baden-Baden, investors will have limited data to sink their teeth into. Otherwise, it will be a relatively light week, with the exception of a few speeches from Fed members, which could potentially create some waves in the FX market. We expect the USD sell-off to take a breather in the short term; however further down the road, we are not ruling out further dollar weakness as patience grows thin over Trump’s promised economic boost.