Breaking: US reaches deal in principle with China, awaits Trump signoff

Bloomberg TV was the first out with the news that the US has finally reached a deal, in principle, with China, which now awaits US President, Donald Trump's, signoff. Bloomberg cited unnamed people briefed on the plans in its report.

• US negotiators have terms of the phase-one deal for Trump.

The markets are doing a victory lap on Trump's behalf as the S&P 500 hits a record on the headline. The markets were already anticipating the announcement when Trump raised expectations that Washington was poised to abandon plans to increase tariffs on a fresh range of Chinese goods this weekend when he tweeted: “Getting VERY close to a BIG DEAL with China. They want it, and so do we.”

FX market reactions

The reactions have so far been relatively muted, with much of the leg work already done ahead of the fact, in principle, on Trump's prior tweeting. Indeed, there was more likelihood of a deeper move on a bearish headline and markets were already pricing in the bullish news in anticipation of a deal. However, considering the caution in markets, there is probably still plenty of upsides to come on an official statement. Markets are now on alert for the signing of the deal with the Chinese ambassador and there are no indications as to when that might take place yet.  

The key crosses in focus on the headline are USD/JPY, AUD/USD, AUD/JPY, DXY and USD/CNH. 

• AUD/USD has rallied to test the 0.69 handle with a high, so far, of 0.6908. At the start of the week, AUD/USD was treading water on 0.68 the figure. 
• USD/JPY has rallied to a high of 109.45 from a full big figure on the downside at 108.45. 
• AUD/JPY has rallied to a high of 75.51 from a low of 74.53. 
• USD/CNH has dropped to a low of 6.9488 from a high of 7.0412.
• DXY has made a high of 97.52 from a low of 97.04.

FX implications

This news probably means that a full-blown currency war is less likely at this stage, but the pessimist in markets will likely be of the opinion that it is too early to say the trade war was over and maybe we are more at a status quo level of a detente than at further deterioration in relationships. Therefore, while the knee-jerk on the headlines is bound to be positive for AUD cross and CNH, it may be a buy the dip scenario on a grind higher so long as good news keeps flowing. 

AUD/JPY has notoriously been the go-to trade on trade headlines. 

AUD/JPY daily chart

The daily chart shows that the price has breached the 2019 downtrend resistance line as well as the 200-day moving average where a confluence of a 50% mean reversion of the mid-April highs to late August swing lows meets. The price action is highly bullish with the prior day's candlestick engulfing followed by a convincing break higher through key resistance today. It is usually prudent not to chase such a large candle immediately and wait for a high conviction price-action set up. Bulls will be looking for any pullbacks to hold above the 2019 downtrend (78.80) and maximise on a constructive continuation trade back above the 200-DMA towards a 61.8% retracement in the immediate future. A grind higher will target the 80 handle.

AUD/USD daily chart

However, traders will want to pay attention to AUD/USD price action as well considering the late Oct and early November double top highs and July lows between 0.6910 around 0.6930 with the confluence of the 200-DMA. If historic price action is to be respected, (where similar rallies have met resistance and pulled back before continuing), we would expect to see consolidation in AUD/USD and a potential pullback before the next grind higher beyond the aforementioned resistance. Hence, why prudent AUD/JPY bulls may choose to look for a constructive and high conviction continuation trade instead of stacking all chips down in chasing the bid at this juncture.