Dollar, Risk Soars as Trump Trade Tease

It's been a rollercoaster ride in FX this week with currencies reacting to every positive and negative headline. Overnight, investors were worried that the Chinese delegation would leave after only one day of talks and even in early morning every one was unclear as to how the primary talks would go. The uncertainty is so high that market watchers resorted to dissecting the body language of every one arriving. By the end of the NY session, the US dollar came roaring back after President Trump tweeted that he will meet "with the Vice Premier tomorrow at the White House." However in the same tweet, he left the market guessing by saying "They want to make a deal, but do I?"

With the outcome of the trade talks still unknown, there could be more fireworks in the next 24 hours. If President Trump agrees to a partial deal with China, USDJPY will make a run for its 1-month highs near 108.50. Other major currencies should benefit from risk on flows as well with EUR/USD testing 1.1050 and AUD/USD heading towards .6850. If negotiations fail and China leaves with no agreement, we'll see today's gains reverse quickly with USD/JPY and AUD/USD feeling the brunt of the pain. While it may not be wise to bet on a deal, President Trump's willingness to meet with Vice Premier Liu He is a sign that a positive outcome is likely. It would also effectively distract news agencies from the impeachment inquiry.

A trade deal would also reduce the chance of further easing from the Federal Reserve this month. Price pressures are subdued according to the latest consumer price index that showed inflationary pressures stagnating in September. CPI growth was unchanged month over month although ex food and energy prices ticked up slightly. Softer economic reports have little effect on the dollar this week as the prospect of global growth hinges on the trade talks.

Meanwhile, sterling rose more than 2% against the US dollar after Prime Minister Johnson and Ireland's Varadkar said they "see pathway" to Brexit deal. No details were provided but Sky News reported that Britain is proposing a limited free trade agreement. The talks now move to Brussels were Brexit secretary Barclay will meet with the EU's chief Brexit negotiator Barnier. We're skeptical that the EU will find any agreement palatable but investors are latching onto any piece of good news as the price action reflects a great degree of optimism. Of course, sentiment could shift quickly if Germany or the EU casts doubt on a deal so its unadvisable to rush into any major positions before a firm outcome is known.

EUR/USD traded above 1.10 for the first time in 2 weeks. Although Germany's current account and trade balance numbers missed expectations, the European Central Bank said a number of members opposed Quantitative Easing and felt that it should be the last resort. However with the region's largest economy headed for recession we are skeptical of the durability of EUR/USD's rally. Investors and the ECB were hoping that the German government would support the economy with fiscal stimulus but based on today's comments from German finance minister Scholz who said the country already has an expansive policy stimulus may not come easily.

All three of the commodity currencies traded higher today on trade talk optimism but the Canadian dollar will be the one to watch tomorrow. Labor market numbers are scheduled for release and economists predict a significant slowdown in job growth. According to IVEY PMI, Canadian companies shed jobs at the fastest pace in since 2016. USD/CAD should rally on tomorrow's report but the forecasts are low, so the Canadian dollar's reaction will depend on the extent of the surprise.