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Dollar Rallies but No One is Betting on a China Deal Just Yet

  • Kathy Lien
  • 9 October 2019

 

 

Daily FX Market Roundup October 8, 2019

 

As China's delegation arrives in the US for trade talks, the greenback extended its gains against all of the major currencies.This is the largest and broadest team that China has sent in the 13 rounds of trade negotiations since 2018. Investors saw this as a strong commitment on behalf of the Chinese to secure a deal before they return to Beijing. But don't bet on a China deal just yet because on the very same day that Chinese officials land in the US, the Trump Administration blacklisted 28 Chinese firms for human rights violations and banned visas for Chinese officials linked to the mass detention of Muslims in the Xinjiang province. According to the US Director of Trade, Peter Navarro these are unrelated issues but the timing adds to the tensions between these two nations and complicates negotiations. Currency traders expect a trade break though this week but US actions suggest that the Trump Administration is playing hard-ball.

 

The sell-off in stocks and Treasury yields is a sign that equity and bond traders are not convinced that a deal (partial or whole) can be done. The size of China's delegation reflects their seriousness and commitment. While Trump previously said they are close to an agreement, the unpredictability of the US President leaves the dollar subjected to headline risk. Right now, we're waiting on Trump to confirm that a deal is very close which extend the dollar's gains but actions speak louder than words so the longer he waits, the greater the risk for the dollar.

 

The talk of purchasing Treasury bills is also negative for the US dollar.According to Federal Reserve Chairman Powell, the central bank is contemplating the possibility of taking these steps to grow the balance sheet for reserve management. While he said this is not QE, it is hard to interpret otherwise because the goal is to support the economy. His comments in general were more pessimistic than last week as he acknowledged that job growth is slowing and global developments pose a risk to the US' outlook. Tomorrow's FOMC minutes shouldn't hurt the dollar but stayed tuned for possible Chinese retaliation.

 

The Australian and New Zealand dollars remain under pressure as traders try to make sense of these conflicting headlines.Chinese data was better than expected with the Caixin manufacturing index rising. In Australia, business confidence fell but business conditions improved. USD/CAD held onto its gains despite stronger housing data.

 

Euro and sterling fell hard. German industrial production numbers were better than expected but with each passing day, the risk of a no deal Brexit increases.Apparently talks between UK PM Boris Johnson and German Chancellor Merkel hit a dead end. A deal based on the UK's latest proposals is highly unlikely and "nearly impossible" according to sources." Tensions are high with European Council President Donald Tusk accusing the UK of playing a blame game and putting the future of Europe and UK at stake on twitter. This public antagonism is a sign that negotiations are not going well. Unless Johnson proceeds with a request to delay Brexit, the next stop for GBP/USD could be 1.20.

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.