No correct amount of caution going into the Xi-Trump G20 meeting

For the Chinese yuan, the Xi-Trump meeting is a binary event.
Philip Wee, Duncan Tan28 Jun 2019
    Photo credit: AFP Photo

    FX: A weak and uncertain end to 1H19

    There is no correct amount of caution going into the Xi-Trump meeting at the Osaka G20 Summit on June 29. The red lines over tariffs remain a hurdle to a trade deal and the resumption of progressive trade talks between the world’s two largest economies. US President Trump has not backed down on whether to impose after the G20 new tariffs of 10% or 25% on the remaining USD325bn of Chinese imports into America. Having been “once bitten, twice shy”, China is not keen on another trade truce like the one struck at Bueno Aires G20 last December.

    For the Chinese yuan, the Xi-Trump meeting is a binary event. A further escalation in trade tensions could lead the yuan to depreciate past the pivotal 7 level on prospects for more aggressive monetary/fiscal measures to cuhsion the Chinese economy. A tariff truce could keep USDCNY within the 6.70-6.90 range it has been since the start of te tariff war. The yuan has not been able to appreciate past 6.70 during the trade talks in January-May because US did not agree to China’s condition to reverse tariffs for a trade deal.

    The Monetary Authority of Singapore (MAS) has not ruled out an off-cycle easing in its SGD policy. The last time the SGD NEER policy was eased outside the usual semi-annual policy reviews in April or October was January 2015. Back then, growth in key indicators such as GDP and non-oil domestic exports were stronger. The government is reviewing its 2019 growth forecast which was revised down only a month ago (on May 20) to 1.5-2.5% from 1.5-3.5% previously. The fallout from renewed global trade tensions was evident in weak non-oil domestic exports; the -12.7% YoY (3-month moving average) contraction was worse than the -9.6% floor in 2016. Pay close attention to core inflation which has slowed steadily from 1.7% YoY in January to 1.3% in May, into the lower half of its official 1-2% forecast range.

    Given increased prospects for a policy easing this year, the SGD NEER is considered too strong in the highest quartile of its policy band. The SGD NEER was in the lower half of its policy band during the off-policy meeting in January 2015. According to our model, the lower half of the SGD NEER band is located, in USDSGD terms, between 1.3760 and 1.4040 this morning.

    Bonds: A US-China trade deal could be problematic

    Over the past 1-2 months, markets have been awaiting today’s G20 for greater clarity on the China-US trade relationship. Markets have taken comfort in the readiness of the Fed and the European Central Bank step in with monetary stimulus to cushion any fallout in US-China trade negotiations. Global assets have performed across-the-board in June, from sovereign bonds and corporate credits to higher stock valuations driven by lower long-term interest rates. Currencies and commodities have rallied against a weaker USD weighed down by expectations of narrowing interest rate differentials. Given the circumstances, is the market ready for any upside surprises from the G20 in the short-term? Food for thought.

    Philip Wee

    FX Strategist - G3 & Asia

    Duncan Tan

    FX and Rates Strategist - Asean

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