More relief than rally after the G20

Muted response in the FX space to the G20 Meeting. Trade truce modestly negative for US Treasuries.
Philip Wee, Eugene Leow01 Jul 2019
    Photo credit: AFP Photo

    FX: More relief than rally after the G20

    This morning’s muted response in the currency markets to the Xi-Trump meeting at the Osaka G20 Summit on June 29 was understandable. The world’s two largest economies have agreed to a tariff ceasefire (for now) and return to trade negotiations. Unlike the previous truce at Bueno Aires G20 last December, there is significantly less optimism that the world’s two largest economies can paper their differences and rivalry to achieve a trade deal. Having been “once bitten, twice shy”, businesses and consumers are likely to be cautious on spending, wary that talks can break down ending with more US tariffs of 10% or 25% on the remaining USD325bn of Chinese goods.

    While relieved that a full-blown trade war has been averted for now, the trade impasse in May/June and the latest tariffs still need to work through the data. For example, China’s composite PMI slipped for the third straight month to 53.0 in June from its last high of 54.0 in March. China’s GDP growth data on July 15 is likely to see growth slowing again in 2Q19 after holding steady at 6.4% YoY in 1Q19. USD bears will also need to wake up to the fact that the Fed is in no mood to be bullied into a single 50bps rate cut at its end-July meeting, or into a rate cut cycle. The Fed does not consider it its job to weaken the USD.

    Rates: Better sentiment as immediate trade war risks get diminished                     
    The G20 meeting outcome is modestly negative for US Treasuries. Market participants have largely anticipated the trade truce outcome and the removal of this immediate uncertainty should provide a lift to equity markets while dampening demand for safety. In the rates space, there is less urgency to deliver an immediate or sizable rate cut. Some aggressive bets on Fed cuts (4 cuts reflected over the coming year) could be unwound. However, we think that upside to USD rates is capped at this juncture. Downside risks to the global economy still loom and the market will probably have a bias towards Fed easing (following much of the developed world) in the coming months.

    With China-US trade tensions temporarily out of the way, focus will probably head back towards US data. Accordingly, this week’s payrolls (due Friday) would be important to determine if May’s weakness was just a one-off. Aside from the blip in payrolls, other labour market data (personal income, spending and jobless claims) are still firm. The slowdown is more apparent in the manufacturing sector where PMIs (due tonight) have trended lower (tracking those across the globe) over the past two quarters. Mixed US data against a backdrop of slowing global growth point to modest bear flattening as the market digests the G20 outcome.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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