• Trump's tariff delay improves conditions for October trade talks, but the hurdles to reach a trade deal remain.

  • Chinese stocks rallied again on easing trade tensions and policy stimulus.
    USD/CNY stabilised just above 7.10. We expect it to stay here for some time.

  • PPI moves further into deflation territory but does not signal a hard landing.
    A cut in the RRR rate signals more efforts to sustain growth at a minimum of 6.0%.

 

Trump delays tariff hike in a 'gesture of goodwill'

The main news this week was US President Donald Trump's decision to delay a tariff hike. In a tweet Wednesday night Trump wrote that 'At the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th anniversary on October 1st, we have agreed as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%) from October 1st to October 15th'. The day before China had exempted 16 US goods from tariffs, although it was only a very small part worth USD1.6bn out of a total of around USD110bn. In addition, the exemptions did not include the goods where China has the most political leverage on Trump: agricultural goods and autos. 

On Thursday, Bloomberg reported that Trump advisers were considering a so-called interim deal with China that would delay and even roll back some tariffs in exchange for Chinese purchases of agricultural products and commitments on intellectual property rights. Last night Trump said about an interim deal, 'It's something we would consider'.

Comment. How should we interpret the new initiatives? I think China has made it clear that if the US carried out the tariff increase on the 70-year anniversary of the PRC, it would be very difficult to make any progress in October. Moreover, by exempting some US goods for tariffs it made it easier for Trump to postpone the tariff increase without losing face. 

While it is positive that the two sides both show the will to create good conditions for the trade talks in October, it does not change the fact that some big hurdles remain, which is why there has been no progress since the break-down in early May. China is not likely to change its 'red lines', which includes a demand that tariffs are rolled back to the starting point and a refusal to make changes to its laws as part of the deal. These are key demands on the US side, as the White House wants a strong enforcement mechanism.

However, the fact that there is willingness on both sides to make a deal makes it a close call . An interim deal seems to be a possibility now, although we do not know how China will respond to this. Our baseline is still no deal before the election with a 60% probability, but it does leave a 40% probability of a deal. As we get closer to the US election, Trump could decide to make the necessary compromises to close a deal that includes big Chinese purchases of agricultural goods benefitting voters in swing states of Ohio, Wisconsin and Wisconsin and a big tariff decline on autos, which would give him some tailwind in Michigan, another swing state. 

 

Download The Full China Weekly Letter

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Analysis feed

Latest Forex Analysis

Editors’ Picks

AUD/USD extends recovery gains to 0.6850 despite China’s coronavirus harming risk-tone

AUD/USD stays on the front-foot while taking rounds to 0.6845 amid the initial Asian session on Friday. The pair recently reacted to the preliminary readings of the Commonwealth Bank (CBA) PMI details for January.

AUD/USD News

USD/JPY falls to fresh lows, correcting on WHO statement

USD/JPY has tumbled to print fresh lows since failing on the 110 handle, scoring 109.26 and meeting the 200-moving average on the four-hour chart.

USD/JPY News

FX Fear Trade Gains Traction

Currencies sold off sharply today as the coronavirus virus spreads to new countries. China may be aggressively trying to contain the virus but the respite should be brief as more cases will be reported before it all peaks. 

Read more

Gold: Steady above $1,560 amid fears of China’s coronavirus outbreak

Gold stays modestly changed from Thursday’s close while taking rounds to $1,562.5 during Friday’s Asian session. The bullion recently benefited from the market’s risk-off sentiment amid fears emanating from China and trade headlines. 

Gold News

GBP/USD pressured toward 1.31 amid risk-off mood

GBP/USD is trading around 1.31, off the highs. Coronavirus headlines are sending traders to the safety of the US dollar. Speculation about the next BOE move is rife.

GBP/USD News

Forex Majors

Cryptocurrencies

Signatures