USD: Tracking US-China negotiations – ING

President Trump's threats of higher US tariffs on China last Friday led to some decisive price action in FX and bond markets. USD/CNH traded sharply higher, but the DXY dollar index dropped even more as investors felt the fallout would be greater on the US than on China. Export data released from China overnight confirms that China has managed to diversify its export base away from the US reasonably well. Friday's price action also saw US short-dated Treasury yields drop by 5-8 bp – confirming this was more a macro threat to the US than a 'Sell America' story, ING's FX analyst Chris Turner notes.

DXY to bounce around on US-China headlines

"Since then, US equity futures have reclaimed around half of Friday's losses on some conciliatory words out of Washington. The threat of an extra 100% tariffs on China is set for 1 November, shortly after the presumed meeting between Presidents Trump and Xi on the sidelines of the APEC meeting in South Korea. In short, there's plenty more time for jockeying for position ahead of 1 November. At the same time, there seems to be no end in sight for the US government shutdown and the dearth of US data. "

"Betting markets are unmoved in attaching a 67% probability that the shutdown extends into November. Instead, the focus will be on central bankers and their communication. There's a plethora of central bankers speaking this week at the autumn IMF meetings in Washington. Highlights include Fed Chair Jerome Powell tomorrow and ECB's Christine Lagarde on Thursday. Expect a lot of official attention on the stock market. Here, the IMF will release its Financial Stability Report tomorrow, which undoubtedly will express some concerns over current valuations. For reference, the S&P 500's current cyclically-adjusted price earnings ratio (CAPE) stands at 39 versus 45 for the Dot Com peak and a 10-25 long-term average."

"This week also sees the release of the Fed's Biege Book on Wednesday evening, which will be scrutinised for any signs of further slowdown in the labour market. Today should be quiet for FX trading, given public holidays in Japan and the US – meaning no trading of US Treasuries. Expect DXY to bounce around on US-China headlines, but 99.50 looks a short-term top, and it could break down to the 98.00 area on Tuesday/Wednesday around the Powell speech/Beige Book."