I knew I should not have published a Yuan view today!!!!
The New York Times reports that U.S. President Trump will allow some U.S. companies to supply China's Huawei. (Bloomberg)
The Times' report is possibly a game-changer.
Huawei was not so long ago at the epicentre of the markets daily trade war narrative risk regime.
This is very favourable for global tech supply chains and hugely beneficial for Chinese equity markets that were already trading a step up on the component substitution narrative as Asia tech giants were becoming more self-reliant.
President Trump appears to be relenting to the U.S. heavyweight giants of the U.S. tech sector, which is a positive sign ahead of the trade meetings.
This could provide one of the most significant breakthroughs, and the market is running with this as USDJPY explodes higher and USDCNH falls to the hugely crucial support level of 7.10
It has been pretty much a one-way move for so far for USDASIA and I suspect those that are not in will engage short dollar Asia on pull back headline risk permitting.
So, the market on again off again affair with trade war detente is back on still as the latest headline suggests that a deal is possible
Just a rehash of this morning view
A mini deal with China would be favourable, but whether it is merely a detente (no new tariffs) or something slightly more substantial (rolling back some taxes) that's the big question for how intense the risk revival extends. But regardless, investors would revel at any sliver of optimism for no other reason than gnawing uncertainty would abate
An obvious point of reaction will be how the market reprices both the Fed and the ten-year U.S. Treasury yields on a positive trade talk outcome. With much of the data unlikely to shift immediately, the expectation for easing through December 2019 may not change dramatically or instantly. But a trade war detente + rolling back of tariffs could see some significant repricing of the 2020 Fed curve.
According to the latest commitment of trader data, the pain trade is for a better deal than the market expects given that the street has adopted a defensive once bitten twice shy strategy ahead of the trade talks.
The S&P index options are running bearishly at nearly 2.5 puts to call ratio, and Gold-backed ETF and Comex positions are running at or near record levels suggesting there's a massive tail risk is if a deal gets hashed out. Defensive strategies look thick, so if these positions are triggered to unwind, it could exponentially amplify the risk revival on a positive trade talk outcome.
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