Forex

Muted reaction in currencies to US-China trade deal; dollar index falls

Reuters SINGAPORE | Updated on January 16, 2020 Published on January 16, 2020

File Photo   -  Reuters

Major currencies mostly shrugged off on Thursday the signing of the Phase-1 trade deal between the US and China, as most of the issues agreed upon had been expected by investors since the summer.

Euro/dollar, the most fluid currency pair, was last trading up 0.1 per cent at $1.1164, matching the one-week high it reached the day before.

An index which tracks the dollar against six other major currencies fell to an eight-day low of 97.14.

Beijing and Washington touted the Phase 1 deal, signed late on Wednesday at the White House, as a step forward in resolving their bitter trade dispute.

US Vice-President Mike Pence fed optimism about further progress, saying further Phase 2 discussions had already begun.

Yet market exuberance was checked because much of this was priced in already and because it addresses few of the issues that led to the trade conflict in the first place.

“Yesterdays signing of the phase one trade deal provided confirmation of the progress made in trade talks since last summer. The details of the deal were broadly in line with expectations which have dampened the market impact overnight,” said Lee Hardman, currency strategist at MUFG.

But other than the fact that it met expectations, analysts said the agreement does not fully eliminate tariffs and is vague on enforcement, and makes no real progress on a host of thorny problems. Some were also sceptical that purchase targets set out in the deal are realistic.

“The deal relies heavily on China's goodwill and includes forced purchases of US goods and protection for Intellectual Property rights and forced technology transfers,” said Sebastien Galy, strategist at Nordea Asset Management.

The centrepiece of the trade deal is a pledge by China to purchase at least an additional $200 billion worth of US farm products and other goods and services over two years. The US will also cut by half the tariff rate it imposed on September 1 on a $120 billion list of Chinese goods, to 7.5 per cent.

“Some demands are extremely hard to swallow, such as changing laws to accommodate the US Overall, it feels like something that will not last more than a few months,” Galy said.

The Chinese yuan, the currency most sensitive to the two-year US-China trade dispute, was also 0.1 per cent higher at 6.8852 per dollar in the offshore market, not far from the six-month high of 6.8662 it jumped to on Tuesday.

The level 7 in dollar/yuan has been a barometer for US-China tensions, so the fact that the Chinese remnibi has remained below this level shows that investors remain more or less optimistic about the trade relationship between the world's two biggest economies and its impact on global growth.

The safe-haven Japanese yen was 0.1 per cent softer at 110.03 per dollar, while the Australian dollar held 0.1 per cent firmer at $0.6916. Both of these currencies were also a gauge of stress.

The British pound rose to a six-day high of $1.3065 . Against the euro, it was trading at 85.45 pence, 0.1 per cent higher.

 

 

 

Published on January 16, 2020
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