China to lower tariffs on $75 billion of US goods starting next week

SUMMARY

ANALYSIS

USDCAD

Chinese authorities were at it again overnight; churning out more positive soundbites for the financial markets in the hopes that this would take the attention off the worsening coronavirus situation on the ground.  This time the focus was on tariffs and how China would lower levies by 50% on $75 billion of US goods starting next week.  More here from the BBC.  This saw markets adopt a risk-on tone in late Asian trade today, but this optimism has since been tempered back following a Global Times tweet that suggested Beijing might invoke an emergency clause to essentially go back on purchase promises that were made in the phase one trade deal. 

GT:: CHINA IS LIKELY CONSIDERING USING A TERM IN THE PHASE ONE TRADEDEAL ABOUT “NATURAL DISASTER AND OTHER UNFORESEEABLE EVENTS” TO LAUNCH A CONSULTATION WITH THE US OVER THE POTENTIAL IMPACT OF THE CORONAVIRUS OUTBREAK ON THE AGREEMENT...: CHINESE TRADE EXPERT CLOSE TO THE GOVT

The official infection count in China has now topped 28,000 and the official number of deaths is now 562; which is maintaining the virus’ surprisingly steady death rate of 2% and is adding more fuel to speculation that Chinese authorities are massaging the numbers.  We’re now hearing reports that China’s northern city of Tianjin, home to 11.5 million people, is beginning lock down procedures.  If we combine all this with news that Honda has announced that it will keep its Wuhan plants closed until February 13^th, there are many out there speculating that the majority of the Chinese economy won’t be able to effectively re-open next week as originally planned.

The OPEC+ joint technical committee has supposedly recommended an emergency 600k bpd cut to oil production in the wake of plunging Chinese oil demand (now widely speculated to be down 25% for the month of February), but they have reportedly not yet fully reached an agreement because Russia is not on-board:  NOVAK SAYS IT'S PREMATURE TO TALK ABOUT AN OPEC+ DECISION RUSSIA: OPEC+ NEEDS TIME TO ASSESS REACTION ON VIRUS: RIA

All this relatively more negative news is helping USDCAD hold chart support in the 1.3270s as NY trade gets underway today and we think traders will look for reasons to move the market higher should this level continue to hold  

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MAR CRUDE OIL DAILY

EURUSD

The Twittersphere is not being kind to ECB chief Christine Lagarde this morning as she announced a series of “listening events” as part of the central bank's strategic review to help people “come to trust us more”.  See here for the full text of her speech before the EU Parliament.  Don’t even get us started about how futile we think this process will be until the ECB does some serious soul searching as to what it has done wrong first.

Germany reported a much worse than expected Industrial Orders number for December this morning (-2.1% MoM vs +0.6%), but this is oddly not bothering EURUSD traders at all.  We still don’t like the market’s chart structure here though and we feel EURUSD is vulnerable to further weakness should it close below the 1.1000 level again.  We think a better than expected US Non-Farm Payrolls number tomorrow could be the next catalyst to push this market lower still.

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APRIL GOLD DAILY

GBPUSD

The sterling sellers are still in charge today following yesterday’s MiFiD-II headlines.  More here from CityWire.  Chart support at the 1.2960 continues to hold however as the broader USD adopts a more mixed tone heading into NY trade.  The overnight headlines for risk sentiment have arguably been mixed, and so we wouldn’t be surprised to see GBPUSD consolidate ahead of the US NFPs tomorrow.

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EURGBP DAILY

AUDUSD

The Australian dollar fell back below the 0.6750s in NY trade yesterday after the combined weight of two better than expected US economic reports (ADP and Non-Manufacturing ISM) proved too much for recent AUDUSD buyers to handle.  This has introduced a mild “sell the rally” mentality ever since, with the 0.6750s now acting as resistance, and we think the emergence of more doubt on the Chinese coronavirus situation has contributed to trader willingness to sell.  RBA Governor Lowe will be speaking two times tonight; first at 5:30pmET before the Australian House of Representatives and then 7:30pmET when presenting the RBA’s quarterly Statement on Monetary Policy.

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USDJPY

We think dollar/yen is disappointing the longs this morning because it hasn’t broken above the psychological 110 level in overnight trade.  The NY close was bullish, yesterday’s US economic news was good and of course we got the positive tariff news out of China.  However, we think enough doubt has crept back in today about China’s ability to handle the worsening coronavirus outbreak on the ground and we think this is what's holding back US yields and USDJPY a bit. 

Think about this too for a second…how bad must it be in China for them to concede so quickly on tariff relief?  Perhaps they’re hoping such action will prompt the US to make a similar good faith gesture?  They’re still in trouble over there and we markets are not really factoring this in.

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GERMAN 10YR BUND YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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