Australian dollar lifts as Trump folds to Chinese demands

DXY was up and away last night as EUR fell:

This capped a trade deal surge in the Australian dollar verssu the USD but not other DMs:

EMs were also strong:

Gold broke:

Oil was soft:

Metals did better:

Not miners:

EMs stocks are on a tear:

Junk was firm:

It was a bond bath of blood:

As stocks closed at record highs:

Westgpac has the wrap:

Event Wrap

China’s Ministry of Commerce Gao stated that US and China had agreed to remove tariffs, phase by phase, as the trade deals are agreed, without stating a timetable. Chinese officials also stated that they would lift tariffs on US poultry imports into China and that they would lower certain capitalisation restrictions on foreign investment in Chinese stocks/firms.

BoE left policy unchanged but surprised markets with a dovish 7-2 vote, as well as a general lowering of their forecasts within their new-look and renamed quarterly Monetary Policy report.
Downside risks both domestically and globally, together with a small widening of an output gap, were cited as reasons for the votes of Saunders and Haskel who called for an immediate 25bp cut.

German Sep industrial production appeared weak (-0.6%m/m, vs est. -0.4%m/m) but revisions to prior readings caused the annual level to beat estimates at -4.3%y/y (vs est. -4.4%y/y).

Event Outlook

Australia: the RBA Statement on Monetary Policy is released. The Governor’s Decision Statement suggested minimal changes to their forecasts: growth at 2¼ per cent in 2019 and then to “gradually pick up”, unemployment to hold around 5¼ per cent “for some time”, and headline and core inflation to be “close to 2 per cent in 2020 and 2021”. Sep housing finance is expected to show the number of owner occupier approvals up 1.1% (Westpac fcs 1.0%).

China: Oct trade balance is expected to edge up to 41.0bn USD from 39.7bn USD in Sep.

US: Nov University of Michigan Consumer Sentiment is anticipated to print at 96.0 with sentiment looking to have stabilised at an above average level. Fedspeak involves Bostic in NY (11:10am AEDT), and Daly and Brainard speak at an event on climate change.

Bloomie has more on the good news:

China and the U.S. have agreed to roll back tariffs on each other’s goods in phases as they work toward a deal between the two sides, a Ministry of Commerce spokesman said.

“In the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,” spokesman Gao Feng said Thursday.

A U.S. official, who spoke on condition of anonymity, confirmed Thursday that an agreement to roll back tariffs would be part of phase-one deal. The negotiations are ongoing and a time or place for any signing of a pact is yet to be determined.

Kellyanne Conway, senior White House adviser, said Thursday that President Donald Trump is “anxious” to sign the deal.

What is that? Is that art of the squeal? Reuters confirms as much:

An agreement between the United States and China to roll back existing tariffs as part of a ‘phase one’ trade deal faces fierce internal opposition at the White House and from outside advisers, multiple sources familiar with the talks said.

The idea of a tariff rollback was not part of the original October “handshake” deal between Chinese Vice Premier Liu He and U.S. President Donald Trump, these sources said.

How far is former “strong man” Trump prepared to go for higher stocks? Sinocism reckons not terribly far:

Gao Feng, spokesman for the PRC Ministry of Commerce, seemed to confirm that the US has agreed to proportionally remove existing tariffs as part of a phase one trade deal, as we discussed in the newsletter earlier this week.

We may also see presidential Twitter praise for the PRC’s public trial and sentencing of several fentanyl traffickers. Cracking down on fentanyl has been a core US demand, and this move by the Chinese government will be seen as a sign of good faith towards satisfying something President Trump has wanted very badly.

So overall the optimism for a phase one trade deal does not look unreasonable, but talk of that deal somehow putting a floor under the declining trajectory of the US-China relationship does.

But none of that matters for now. This is now a runaway train of non-deal good news clearly based upon El Trumpo’s desire to be re-elected.

It was unusual for the US dollar to rise on trade war good news so that’s capped the Aussie advance. I still can’t see it getting far given the strong DXY, limited trade deal gains, a weak Europe and fading China but whiel the risk party continues it will obviously have a bid.

Houses and Holes

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 fouding 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.

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Comments

  1. Stewie GriffinMEMBER

    El Trumpo will acquiesce to get the deal done, enjoy the lift in the polls and the boost to stock market as the economy skirts recession a little longer.

    This will give him time to see who his eventual Democrat opponent is going to be, after which he’s going to call China out for cheating (which they probably will be doing) then he’ll put them all back on and wedge the phuck out of any Democrat opponent with the possible exception of Bernie or Tulsi.

    Save this comment.

      • Stewie GriffinMEMBER

        I was one of two guys in the trading room who thought both Trump and Brexit had a good chance. But then maybe that’s just because I’m a contrarian phucker.

    • I doubt the economy can skirt the recession any longer, trade deal or not. As tariffs are removed some US manufacturers will feel the hit from Chinese competition. More companies will move offshore to China, Vietnam or Mexico. Trump basically lost. Trump lost even if he goes back and re-introduces tariffs again as no one has appetite to go through the pain all over.
      XI has the upper hand as he does not worry about elections – the vagaries of democracy even though US is anything but democratic. There should have been open bipartisan support from all sides so Trump is free to play tough but that was not case as Dems kept positioning that they could have handled the negotiations better. That would have been true but it does not help US at present and weakened US’s position.
      At the end I don’t blame Trump for the capitulation, not fully. But he did make some blunders. His biggest mistake was when he did not go full bore tariffs – all in at the very start. That way he would have applied max pressure and reduce Chinese’s time advantage.

      • Stewie GriffinMEMBER

        All he’s got to do is skirt a recession for another 6mths or so. Recessions in the US are always declared ex-poste anyhow, so if he can keep growth positive for 6-9mths that is all he needs to do.

        IMHO if it manages to skirt recession it also increases the chances that he’ll face an establishment democrat contender, as opposed to a Bernie or Tulsi (who’d I’d actually support). It would then be easy to manufacture a China cheating claim and put all the tariffs back on to wedge against the mainstream democrat that the DNC will select. IMHO his worst nightmare would be running against someone like Tulsi.

        Agree with your points re his tactical blunders in terms of giving the Chinese wriggle room, instead of completely crushing them from the outset, but then how well would have that played into his re-election strategy if we were in the midst of a Global recession? Save that for the 2nd term.

      • Stewie GriffinMEMBER

        I like Tulsi, I think she is highly trust worthy, then probably Bernie. Not so sure on Liz Warren – I love this quote:

        She wants to privately assure him that is her public stand, not her private one, but it’s just between the two of them.

        — SeattleSoaker (@SeattleSoaker) November 7, 2019

        It’s not like we can trust a word that comes out of her mouth anyway (or perhaps 1/1024th of her mouth)?

        https://www.zerohedge.com/political/liz-warren-offers-meet-bill-gates-explain-exactly-how-much-hed-pay-under-her-wealth-tax

    • Ronin8317MEMBER

      Trump was in a winning position. China is in serious trouble and Trump have them over a barrel, could have gotten everything Trump wanted if he persist for another quarter, but instead : he folds.

      This is even worse than his decision in Syria to withdraw US troops, let the Turks ethnic cleanse the area, then send the troops back in..

      • Stewie GriffinMEMBER

        IMHO he wants the sugar hit of the market popping up or at least not crashing before the election – he did have the Chinese over the barrel, but although it would have been good for America how would have it been good for his reelection chances if his greatest success saw him removed from office?

        Crushing China will trigger the recession that the US has to have – it is impossible to break the unholy symbiotic Globalist relationship between the US and China without it.

          • Stewie GriffinMEMBER

            That will occur in the 2nd term if Trump wins – it will also trigger the global recession we had to have, but that will be someone else problem and El Trumpo will be written into the History books as the greatest US president since Regan or even Kennedy.

      • Not sure how could Trump (or anyone in US) win this strategic war when ^every^ move US makes against China hurts itself – if not more then at least the same. In my view US could have won this only if it was never an open confrontation and if it made it a long term slow strategy. It should have been a battle to bring back the manufacture and/or to make US produced goods more competitive. A recession is the only weapon US has that hurts China more (financially) but we are yet to see a potus that will have the balls to trigger one even if it meant long term benefit. This again puts China in advantage as their fights are planned for next decades, US is only 4+4 yrs at best, unless bombing by far smaller and defenceless countries into submission.
        The tariff war in this form has been lost the moment it began in this form. This unless Trump incites a recession that no QE and other synthetic means outside his control can reverse until it clears all the rot. Trump may be daring enough to take that path but I guarantee you his motorcade will get him down a Dealey Plaza of his own.

  2. I am not sure if this is good for the AUD. If China is allowed to continue doing business then it allows them to transition into high end manufacturing and service without a need to do too much stimulus. Demand for IO, coal and Gas will not increase by US dropping tariffs. It only allow US and other companies to keep their operations in China instead of moving them to Vietnam. Global demand stays same with same overcapacity in everything. If anything China may shut some overcapacity now.

    • I’m wondering if $AUD surges to 70 cents+ again or remains around 69 cent going forward? I wan to convert $USD to lock in gains.. just not sure if I should do it immediately or wait.. Decisions decisions.

      • the way I see it.. this is mugs game now. No one can really predict which way is going to go. Who can predict when/if China implodes and what comes next. Who can predict how fast China will transition from low end manufacturing to high end and develop strong services industry – and if it does at all.

      • just to add to my comment below. Hence why I stopped thinning long term. If I have profits I collect. Seen too many times when from profit the investment went into a loss and become long term holder or forced to sell at a loss. fckn.

      • Gavin. I’ve been trading currencies for a few years now (just AUD/USD pair). So far, averaging 30% p.a. on my risk capital. I also have some plain old US dollars stashed in a bank. That has improved in relative value vs AUD about 10% over 30 months, i.e. 3% p.a. and lots of downside risk associated if the poo goes back up.
        I’m sorry, that may not have been expressed very clearly. I’m saying that changing some of my money into USD 30 months ago has yielded relatively poor results, but trading the AUD/USD currency pair has yeilded damn good results.
        However, I work pretty hard for my FX winnings, it’s not free money.
        But, if you really want to get some money into USD and don’t want to become a stressed-out currency trader like moi, why not consider opening an FX trading account funded in AUD and do really relaxed trading. Use low leverage (e.g. 3:1) and long time frames. If you base your trades on your belief about fundamentals, you will be doing the same as actually converting a big lump of AUD into USD and putting it in a bank, your conversion costs will be much lower and your ability to react will be much faster.
        There is always the issue of counter-party risk. FX brokers are not banks and are not bank-safe.
        Also, bear in mind that 80% of people who try serious currency trading get completely wiped out. That is not what I’m suggesting. I am suggesting it as a viable way to execute a buy and hold strategy.

        • Oh yes. Forgot to add, if anyone is interested in my opinion, I have no positions open on AUD/USD right now. I haven’t the faintest which way it’s going to go next or even the probablilities. A long burn up to .705 seems equally likely as a plunge back to .665

          It’ll probably be an unexpected Trump tweet that’ll send it one way or the other. If not that, then a political scandal or global event.

  3. Just finished reading Reuters Article and US side says there is no agreement on tariffs at all. Some even commented this is just Chinese propaganda. Not sure if US is just playing tough while in reality they are dropping their pants and bending over or Chinese are just playing mind games.

    • The Chinese ALWAYS play mind games. It is what they do.

      The US side has confirmed that tarrifs are part of the ‘phase 1 deal’ so there is SOME truth to what the Chinese are saying but not likely all of what they are saying.
      There is probably an agreement for the reduction of some tariffs over time as a compliance mechanism to make sure the Chinese do what they say they will. I don’t buy ‘removal’ of tariffs.

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