Australian dollar hangs on as China buckles to Trump

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DXY fell overnight as EUR firmed but CNY fell:

AUD/USD was heavily bid again back to 0.70 cents though its chart is still very bearish:

It was weaker versus EMs stocks:

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Gold lifted modestly:

Oil jumped:

Metals were stable:

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Miners rose:

EM stocks were hammered via Shanghai:

Junk was OK:

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Treasuries were bid:

Bunds too:

Stocks took another moderate hit but well off the lows:

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Westpac has the wrap:

Event Wrap

Markit’s April Eurozone services PMI was revised up to 52.8 from a preliminary 52.5, adding to stabilisation signals for the region. Eurozone retail sales were unchanged in March, a better than expected showing, and the previous month was revised up 0.1ppt to 0.5%.

FOMC member Harker agreed with a cautious approach to normalization but still saw potential for one rate hike in each of 2019 and 2020.

Event Outlook

NZ: The RBNZ 2yr-ahead inflation expectations survey has been at around 2% since Q4 2017.Australia: the RBA policy meeting is ‘live’ with markets pricing in just short of a 50% chance of a cut and a slight majority of market economists (14/26) favouring a move. Westpac sees that the case for a cut has strengthened but still expect that the first move will be in August rather than May. Mar retail sales are expected to rise 0.2% (Westpac fcs +0.1%) with Q1 retail volumes up 0.3%. Mar trade balance is anticipated to post a $4.5bn surplus (Westpac $4.2bn), a touch lower than Feb’s record $4.8bn.

Euro Area: the EU Commission forecasts are released.

US: Mar JOLTS data is released. Fedspeak involves Kaplan in Beijing, and Quarles on financial regulation.

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If you read the moronic Australian press then you would conclude that Trump just spat the dummy for no reason. The trigger was, in fact, Chinese back-flipping, via Bloomberg:

Donald Trump’s top trade negotiator told him that Beijing was back-tracking on a trade deal following a round of talks last week, angering the president and leading him to threaten on Sunday to raise tariffs on Chinese goods, according to people familiar with the matter.

In talks last week in Beijing, Chinese officials told their U.S. counterparts they would not agree to a trade deal that required changes to Chinese law, the people said. China had previously agreed to change its laws in the text of the deal, they said.

The change has major implications for provisions of the deal aimed at ending a Chinese practice of forcing U.S. companies seeking to do business in the country to reveal proprietary technologies and other intellectual property.

Let’s face it, that is the only reason we have a trade war in the first place so if China won’t stop it then it’s going to get worse. The Trump tactic worked, with China buckling and sending its delegation anyway, via CNBC:

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One of the sources briefed on the status of talks said the Chinese would send a smaller delegation than the 100-person group originally planned. It is unclear whether Vice Premier Liu He would still helm this smaller group, an important detail if the team were traveling to Washington with an eye toward sealing a deal. Two senior administration officials described Liu as “the closer,” since he had been given authority to negotiate on President Xi Jinping’s behalf.
The team from Beijing was set to start talks with American negotiators on Wednesday as the world’s two largest economies push for a trade agreement. It is unclear whether the talks will still start Wednesday.

But after the market closed, the US confirmed tariff hikes will proceed, via Bloomie:

President Donald Trump’s top trade negotiator said the U.S. plans to raise tariffs on Chinese goods on Friday, accusing Beijing of backpedaling on commitments it made during negotiations.

A Chinese delegation will visit Washington as planned this week, with talks to take place Thursday and Friday, U.S. Trade Representative Robert Lighthizer told reporters Monday. The Trump administration plans to increase duties on Chinese imports at 12:01 a.m. on Friday, he said.

…Over the weekend, it became clear that China was pulling back on language in the text on a number of issues, which had the potential to dramatically change the deal, Treasury Secretary Steven Mnuchin said at the briefing in Washington. The U.S. isn’t willing to re-negotiate previous commitments, said Mnuchin, adding that about 90 percent of the pact had been finalized.

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We’re not out of the woods. Tech IP is the core of the issue and unless the Chinese stop stealing it then the trade will get worse not better. Trump has all the leverage, via Deutsche, with a bazooka now pulled:

With China much more vulnerable to the trigger that the reverse:

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And any Chinese response hobbled by massive debt, not that that will stop them in the short term:

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Surplus countries do not win trade wars. Hopefully China will acknowledge this fact and commit to a fair playing field on intellectual property before the bazooka goes off.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.