US-China trade deal tomorrow: A dance around a maypole

Outlook

The rate cut today is fully priced in and the only unknown is how much the Fed will point to ending quantitative tightening (QT). It will be interesting to see if it promises more quantitative easing in the event of a liquidity problem. Mr. Powell tends to be cautious, so probably not, but that doesn’t mean the market won’t hear what isn’t said out loud. We doubt there will be reference to a Dec cut, but at some point if there is a strong statement about QT, the market might have to let go of it. 

At a guess, risk-on went overboard and will back off, which has the potential to deliver “sell on the news” in the dollar. Or hope (most of it false) of a US-China trade deal tomorrow will continue to deliver support to the dollar.

Whatever the US-China trade deal tomorrow, it will be a dance around a maypole. It won’t shift the pole itself. Bloomberg wisely points out the deal will not address the core issues of the conflict, which is greater independence on China’s part and rebuilding the industrial base on the US’ part. Trump wants a re-balancing that will dramatically reduce US dependence on Chinese imports, meaning a drop in Chinese surpluses, too.

China is not on board. Its new 5-year plan emphasizes a modernized and revitalized manufacturing sector that will retain dominance. Tech executives return from visits to China shaken and upset at the advances they have seen there. In a nutshell, China is far ahead of the US on robotics, clean energy, high-speed rail, emerging high tech (electric batteries, hypersonic technology, advanced aircraft engines), AI and quantum computing, and a dozen other areas. We suspect that long-term planning (vs. the US’ focus on the next quarterly report) and long-term development of trade partnerships, including all those ports, can beat the US short-termism in the end. The end being three years of the five.

More than one analyst expects the deal tomorrow, no matter what it is, to be only a single step for China of a 100-mile journey. Trump doesn’t understand that, meaning we have to expect more tantrums and threats and general bad behavior. Gold bugs, take heart.

We are not alone in seeing no great progress. The headline of Reuters editor Dolan’s article today is “48 hours to test the exuberance.”

“Bulled up by another wave of AI deal-making and earnings excitement and with interest rates about to fall again, Wall Street now faces two days of critical monetary policy, earnings and global trade events that will test week's optimism.”

Meanwhile, the rest of the world is still out there. The Netherlands votes today. Europe delivers hard data tomorrow plus the ECB rate decision, universally expected to be a hold.

A big question mark is Japan. The BoJ meets overnight tonight with no change expected. If the new government is pressuring the BoJ, we are not hearing about it.

TreasSec Bessent broke the rule of US Treasury Secretaries keeping their mouths shut about currencies. He said the BoJ should be given scope to adjust monetary policy in light of inflation. Some call this verbal intervention. The immediate effect was a giant drop in the dollar from 153.26 the day before to 151.53 yesterday, or a 38% retracement of the upmove. It also formed a double top whose neckline is 149.37. If Bessent was aiming for that—and this guy understands FX—he is probably going to be disappointed.

Forecast

We may get some fireworks today. Rate cut, check, but if the Fed seems aggressive about QT, that adds to the dovish stance and could well be dollar negative when everyone thinks the negativity from the cut is already fully priced in. We also worry about “sell (the dollar) on the news.”

So, dangerous waters. We always advise not to try to navigate the FX market on Fed day. A double dose of dovishness (cut plus winding down QT) could have the perverse effect of supporting the dollar—the growth narrative. Or first one sentiment on the news and then the other on the Powell comments, with perhaps a pivot back to the first idea upon reflection. Nobody knows and it’s foolish to try.

Conventional wisdom calls for a weaker dollar. But the mood is euphoric on trade deals, company earnings, even job losses due to AI compared with the productivity gains from AI. This is glam and glitz popularity with an uncertain underpinning (government shutdown, presidential power grabs) but can persist for longer than we think. The madness of crowds? Maybe, nut also maybe not. Railroads, the internet. It took years fir bubbles to burst.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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