Deal Agreed But Not Yet Signed
It has been a difficult few weeks for traders recently as markets have reacted neurotically to the seemingly constant stream of contradictory headlines around Brexit and US -Sino trade negotiations. At the end of last week, global equities indices were rallying on news that the US had agreed an interim trade deal with China, albeit a verbal one so far. Following two days of talks in Washington between high levels officials from both countries, President Trump proudly announced that the two sides had agreed a “tremendous” trade deal. The deal referred to by the president as “phase one”, is said to include Chinese purchases of roughly $50 billion of US agricultural products along with the US cancelling the next round of tariffs which were due to go live this week. Trump described the talks as a “love fest” between the two countries.
This week started on a slightly rocky footing however, as it was reported that China was not yet willing to sign the deal. According to reports, China wanted to go over the details agreed at last week’s meetings before ratifying the terms of the deal. Traders were understandably spooked given the disappointing collapse in talks earlier in the year when China allegedly backed away just ahead of signing a deal.
The US was quick to caution China with US Trade Secretary Steve Mnuchin warned that should China fail to sign the deal ahead of December 15th, the next round of US tariffs scheduled for that date would still be applied. Speaking with CBNC, Mnuchin told reporters that the US and China “made substantial progress last week in the negotiations” and now “have a fundamental agreement that is subject to documentation.”
Despite some initial risk aversion around Chinese hesitation, equities traders have since been encouraged by comments from Chinese foreign ministry spokesman Geng Shuang who told Chinese press that “China and the US are on the same page and have no difference in the stance on reaching a trade deal”. Shuang added “This trade deal is going to carry very important meaning to China, the US and the world, it will be beneficial for world trade and world peace.”
US Pushing For Deal To Be Signed in November
The US is aiming to get China to sign off on a deal ahead of the Asia-Pacific Economic Cooperation (Apec) summit in Chile in November and Chinese media is reporting that talks could continue next week. Risk sentiment is now being supported by signs of momentum with Mnuchin saying that the US Trade Representative and Trade Secretary are planning a call next week with Chinese Vice Premier Liu-He ahead of a further round of talks in the next few weeks ahead of the APEC meeting, to pave the way for Trump and Xi to sign a deal.
Mnuchin told CNBC: “The next phase is there is deputy level calls that will be going on this week…Ambassador Lighthizer and myself will have a principal level call next week with the vice-premier.” Mnuchin went on to say that “My expectation is we’ll have the deputies meet between now and Chile, and my expectations are that we will be meeting with the vice premier in Chile before the presidents meet to finish the deal,”
Incoming headlines around the ongoing trade negotiations will be closely watched by the market and while the risk of a setback remains elevated, the market is remaining optimistic for now. CNH has been gaining against USD since news of the deal broke. If talks remain on course and a deal is agreed, further downside could be seen.
Technical & Trade Views
USDCNH (bullish, above 7.0472)
While Longer-term VWAP remains positive, price is overextended, having reversed near the yearly R1 at 7.1556 and the head and shoulders pattern at highs points to the risk of a bigger correction lower. If we break below the monthly S1 at 7.0472 I will be looking to use a retest as entry point for shorts (price action dependant). On the other hand, if we hold bids into the monthly S1 we could see another build higher though this move would likely lead to further consolidation instead of fresh highs.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!