China: the tide has turned - we lower our USD/CNY forecast

A phase one deal is still on track and is set to include some tariff roll-backs. The likely timing and location of the signing are still unclear, though.
Chinese stocks and the CNY cheered on the positive trade news. We believe the tide has turned for USD/CNY and lower our forecast to 6.8 in 12 months from 7.0.
China's free trade agreement with Asian countries, RCEP, sends a clear signal: we are against unilateralism and tariffs, and pro multilateralism and lower tariffs.

Allan von Mehren Danske Bank A/S

Note that China Weekly Letter will not be published next week, as I will be travelling in China.

Rising optimism over US-China trade talks

This week provided further optimism that the trade war has peaked and a phase one deal is in the pipeline - a deal that could include a roll-back of some tariffs. China's spokesman from the Ministry of Commerce said on Thursday that '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'. Both sides agreed to reduce tariffs proportionately and at the same time in different tranches as sequential deals are struck. China is pushing the US to cancel the tariff increase in December and remove the 15% tariff rate imposed on 1 September on Chinese goods worth USD125bn. According to Reuters China also aims for relief from 25% tariffs put on goods worth USD250bn. White House spokesperson Stephanie Grisham told Fox News on Thursday the US is "very, very optimistic" about completing a trade deal.

The timing of a phase one deal is uncertain and according to a US official it may stretch into December. The location is also not agreed upon and a dozen places have been aired ranging from Iowa, Alaska and Hawaii to London, Sweden and Switzerland. The signing spot may depend on when a deal is ready, as it could take place in connection with other travel by the two presidents of US and China.

A few things happening on the Chinese side should help soothe the atmosphere for the continued trade talks: this week nine Fentanyl smugglers were jailed in a landmark US-China cooperation. The crackdown on opioid shipping from China to the US was part of the first ceasefire deal made between Xi and Trump at the G20 meeting in December 2018. In August, however, Trump accused China of delaying action on this. Another positive thing happening was a Chinese removal of curbs on US poultry imports.

Comment. We look for a phase one deal to be signed in late November or early December and expect it to include a roll-back of the 1 September 15% tariff hike on USD125bn of goods. A deal will also include China buying more agricultural goods, which we suspect Trump is quite anxious to get started as US farmers are hurting badly from the trade war, and farmers are key in the political swing states Ohio, Iowa and Wisconsin. It will still be a tough deal to make, though, and we should be prepared for potential set-backs on the way. China has some leverage due to the weakening US economy that will increasingly hurt Trump's re-election platform. On the other hand, China also wants a solution to the trade war in order to slow down the pace of companies that are leaving China for production in other countries. So the two sides should be able to land a phase one deal.

Download The Full China Weekly Letter

Author

Allan von Mehren

Danske Bank A/S

EUR/USD stays defensive below 1.1900 as USD recovers

EUR/USD trades in negative territory for the third consecutive day, below 1.1900 in the European session on Thursday. A modest rebound in the US Dollar is weighing on the pair, despite an upbeat market mood. Traders keep an eye on the US weekly Initial Jobless Claims data for further trading impetus.

GBP/USD holds above 1.3600 after UK data dump

\GBP/USD moves little while holding above 1.3600 in the European session on Thursday, following the release of the UK Q4 preliminary GDP, which showed a 0.1% growth against a 0.2% increase expected. The UK industrial sector activity deteriorated in Decembert, keeping the downward pressure intact on the Pound Sterling.

Gold sticks to modest intraday losses as reduced March Fed rate cut bets underpin USD

Gold languishes near the lower end of its daily range heading into the European session on Thursday. The precious metal, however, lacks follow-through selling amid mixed cues and currently trades above the $5,050 level, well within striking distance of a nearly two-week low touched the previous day.

Cardano eyes short-term rebound as derivatives sentiment improves

Cardano (ADA) is trading at $0.257 at the time of writing on Thursday, after slipping more than 4% so far this week. Derivatives sentiment improves as ADA’s funding rates turn positive alongside rising long bets among traders.

A tale of two labour markets: Headline strength masks underlying weakness

Undoubtedly, yesterday’s delayed US January jobs report delivered a strong headline – one that surpassed most estimates. However, optimism quickly faded amid sobering benchmark revisions.

Sonic Labs’ vertical integration fuels recovery in S token

Sonic, previously Fantom (FTM), is extending its recovery trade at $0.048 at the time of writing, after rebounding by over 12% the previous day. The recovery thesis’ strengths lie in the optimism surrounding Sonic Labs’ Wednesday announcement to shift to a vertically integrated model, aimed at boosting S token utility.