USTR Lighthizer says US/China phase one deal is "totally done"

SUMMARY

ANALYSIS

USDCAD

Dollar/CAD finally rallied off the 1.3160 support level on Friday, but it took a healthy dose of US/China trade deal skepticism during NY trade before that could happen.  While Chinese officials confirmed that they reached a “phase one” trade deal with the US and President Trump confirmed this at the same time through a series of tweets, the barrage of headlines around the 10amET hour lacked detail around how much agricultural purchases the Chinese would make and when exactly some of the promised existing tariff reductions would be rolled back.  More importantly, nothing was written down yet again and so the markets reacted negatively with a “ok...we’ve seen this before…ya, right” type of response.  Mild “risk-off” was the theme for most of the day on Friday, allowing USDCAD to rebound back to the 1.3200 level at one point.

All this pessimism has reversed over the weekend however after US Trade Representative Lighthizer said the “phase one” deal will nearly double US exports to China over the next two years and is “totally done”, despite the need for translation and revisions to its text.  What a perfect soundbite.  More here from Reuters.  Risk-on sentiment also got a shot in the arm by way of some better than expected November economic data out of China.  Chinese Industrial Production came in at +6.2% MoM vs +5.0% expected last month and Chinese Retail Sales was reported +8.0% MoM vs +7.6% expected; further alleviating some concerns about a Chinese-led, global economic slowdown.  And just like that, the S&P futures are falling for it yet again.  USDCAD, being sensitive to the overall trade mood, opened Sunday trade immediately below chart support in the 1.3180s, and when the market couldn’t regain that level in Asian trade, it was a signal to the sellers to once again have free reign. 

The leveraged funds at CME were largely in liquidation mode during the week ending December 10, perhaps because of the December/March futures roll, but their net short USDCAD position remained largely intact at roughly 50% of what it was during October.  We think they’ll begin reaccumulating here if the market closes today’s trade below the 1.3150-60s as a close below would confirm the start of a new downtrend in our opinion. 

This week’s US and Canadian economic calendar will feature the US Industrial Production figures for November (tomorrow), Canadian CPI for November (on Wednesday), the US Philly Fed survey for December (on Thursday) and finally the Canadian Retail Sales report for October (on Friday).

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JAN CRUDE OIL DAILY

EURUSD

Euro/dollar traders have been pretty much following gold prices here to start the week.  Friday’s move lower was a bit of a head scratcher given the slump in US yields and the bid to precious metal prices following the US/China trade deal headlines, and today’s price action is not making a whole lot of sense either.  We got weaker than expected flash Manufacturing PMI data out of Germany and the Eurozone for the month of December, yet the market has largely shrugged this off.  The US 10yr yield is reluctantly trading higher in our opinion this morning, as it only gives back half of Friday’s losses, but this is not hurting EURUSD all that much either.  Perhaps it’s all about option hedging flows again this morning, as over 2.5blnEUR in expiries come off the board shortly between the 1.1120 and 1.1150 strikes.  Friday’s swift rejection of the 1.1200 level after the UK election result, plus the NY close below the 1.1150-60s, has stalled the market’s upward momentum post Fed.  We can see this now as the market now bumps up against the 1.1150s now as resistance.

The funds at CME kept their net short EURUSD position largely the same during the week ending December 10, according to the latest COT report issued by the CFTC on Friday.  This report didn’t capture last Wednesday’s Fed meeting however, and so it will interesting to see this Friday if fund short covering has now begun.  Germany reports its December IFO survey tomorrow.  Option-related flows look like they could become an anchoring force later this week as well, as we'll have over 2blnEUR expiring between 1.1125 and 1.1150 on Wednesday, and then 1.8blnEUR expiring at 1.1150 on Friday.

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FEB GOLD DAILY

GBPUSD

Some poor UK economic data is providing a reality check for GBP traders this morning.  The December flash PMIs for the UK (Manufacturing, Services and the Composite index) all missed expectations this morning, which has curbed the market’s brief Brexit-optimism driven foray above the 1.3400 level earlier today.  While our Reuters Eikon charts don’t show it, we continue to believe there’s a 5pmET upside gap on the hourly GBPUSD chart from last Thursday night; a void of prices that didn’t trade during the release of the UK exit polls and that will therefore attract interest from the short term trading community at some point this week.  This means GBPUSD could easily trade back down to the 1.3200 mark in our opinion, and we have plenty of UK news catalysts on the docket this week to potentially help with that.  The UK reports its November employment report tomorrow.  Wednesday brings the release of the November CPI.  Thursday morning will feature November Retail Sales data, plus the Bank of England policy meeting.  Finally, on Friday, we’ll get the release of the UK’s Q3 GDP figures.

The leveraged funds trimmed their net short GBPUSD position further ahead of the UK election result last week, and we have to wonder at this point if they’ve completely thrown in the towel (given the 350pt surge in the market on Thursday night).  Friday’s daily bulletin from the CME (showing the overall change in GBP futures open interest from day to day) hasn’t given us any clues unfortunately, as the report showed a rather modest 2,218 contract increase.

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AUDUSD

The Australian dollar and Chinese yuan are reluctantly following the S&P futures higher this morning in our opinion.  The stock market is buying this “phase one” US/China trade deal, but you can feel the skepticism still within the bond, commodity and FX markets.   Are US farmers really going to go out and start buying bigger tractors (as President Trump suggested they do) based on what they heard on Friday?   Does anybody honestly believe China will buy 40-50blnUSD/year in US goods when they haven’t even come close to this (on an annual basis) over the last 20yrs?  At best, we’ll get a return to pre-tariff levels in terms of agricultural commodity purchases from China, and even then it will based on local market demand in our opinion, not some political decree.  What is more, the Chinese stats bureau (that released this weekend’s better than expected November economic data) admitted that while the phase one deal helps improve market expectations, there any indications that some of the key points are lost in translation.  Are you kidding me? 

This whole US/China trade story is becoming a joke; a pathetic parody of teases, promises and dramatic non-events that you could make into a comedy show.  If it’s such a great deal, why do the US and Chinese narratives never line up?  Why is there still nothing written down?  Why are the details so secret?  Why aren’t US soybean prices surging?  It’s because there is no deal…there never was…and frankly, we still believe there doesn’t need to be.  The Trump administration, in our opinion, needs to milk the positive headlines out of this trade war (that they created), for political purposes, for as long as they can.

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USDCNH DAILY

USDJPY

Dollar/yen is clawing back half of Friday’s risk-off move this morning, but it’s with the same lack of enthusiasm we see in US 10yr yields this morning.  The US flash Manufacturing PMI met expectations of 52.5 for the month of December, which has oddly given the market a little boost here.   The funds at CME reduced their net long USDJPY position for the 1st time in 7 weeks during the week ending December 10.  This week’s Japanese calendar features the Bank of Japan’s policy meeting on Wednesday night ET (Thursday’s session), but it should be a non-event as usual.  See here for a preview from the Japan Times. 

Last week’s US/China and Brexit driven recovery to USDJPY prices has done much to repair the daily chart structure in our opinion.  We think a strong NY close above the 109.60s could usher in another wave of buying that could restart the market’s uptrend and target the 110 handle.

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US 10YR BOND 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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