The probability that the summit in Japan will put an end to trade disputes between the US and China is extremely small. It is unlikely that China will agree to the draconian conditions dictated by Washington, and Trump understands this perfectly well. He will not introduce additional duties on Chinese goods either, because he knows the market reaction to this. By the way, the market began to react sluggishly to the latest information in this dispute, and in the absence of agreements may even stand still.
Another thing is if the leaders of the US and China decide to cheat and make small mutual concessions, conclude a nominal transaction, the terms of which will be radically different from the important tasks. In this scenario, it is not easy to predict market behavior.
Anyway, there’s a lot at stake. If Donald Trump does not like what Xi Jinping says, he can still consider the introduction of tariffs for all imports of China. This will force the Fed to lower the rate already at the July meeting and to signal the continuation of the policy easing cycle, which, in turn, will drop the dollar. The futures market signals three rounds of rate cuts within twelve months. It should be admitted that the CME derivatives were right. Despite the statements of US Federal Reserve officials about the rate hike in December and their desire to pause in January, fixed-term contracts believed that the Central Bank will have to change the course of monetary policy and the escalation of the US-China conflict will force the Fed to act.
On the one hand, the deal with China will be a plus for Donald Trump. The world community and financial markets will see this as a personal success. There are elections ahead, and the Republican will have more chances for re-election for a second term. There’s another side. The owner of the White House understands that the agreement with China will further strengthen the position of the dollar, the Fed will refuse to reduce the rate, because the US economy is already strong, and the uncertainty associated with the trade conflict with China will disappear. The yield of Treasury securities will go up, taking with USDX. In this situation, it is necessary to strengthen criticism of Jerome Powell and put pressure on other countries.
Recently, the President of the United States was asked: will the EU be the next target of the policy of protectionism? He replied that Europe treats America even worse than China. Criticism of ECB head Mario Draghi and the statement that the EU and China have been using the practice of weakening their national currency for many years, suggests that one of the “hot” topics at the summit will be the currency war.
Sharp movements in the EUR/USD pair to 1.12 or 1.15, perhaps, can be expected in two cases: at the conclusion of the transaction between the US and China or after the introduction of new tariffs for imports of China. If the parties only announce the resumption of negotiations, the market will take time to reflect.
The yen will grow by 4.5%
Positive news about the results of negotiations between Washington and China may contribute to the decline of the Japanese yen paired with the dollar in the short term. However, the traditional role of a protective asset portends good prospects for it. According to Goldman Sachs forecasts, the national currency of Japan, unlike many other assets of the safe zone, still remains undervalued. The bank expects that within twelve months, the USD/JPY pair will fall to 103, that is, it will be 4.5% below the current levels. At the same time, the fair value of the rate in Goldman is called 95 yen per dollar.
The Japanese Central Bank has limited opportunities for easing monetary policy. This factor also supports the “bullish” view of the yen. The current situation, according to experts, resembles the period of growth of the yen before “Abenomics”.