Home 3 scenarios for the Trump-Xi Summit on trade

3 scenarios for the Trump-Xi Summit on trade

  • Presidents Trump and Xi meet in Buenos Aires to talk trade.
  • Recent signs have not been promising and lower expectations.
  • There are three scenarios for the event and currencies.

US President Donald Trump meets his Chinese counterpart Xi Jinping on the sidelines of the G-20 Summit on November 30th. Trade tops the agenda. Here are the latest developments of the trade war in brief.

Back in September, the US slapped a 10% on around $200 billion worth of Chinese goods. The duty on these specific items is set to increase to 25% in 2019. China responded with counter-duties on around $60 billion worth of US goods.  Also, the Administration is mulling tariffs on the rest of China’s exports to the US, valued at around $267 billion.

On November 1st, Trump and Xi had a phone call that the US President described as “great.” Stock markets rallied on the  news, but as it happened before the elections, the effect faded quickly. Since then, Trump said that China wants to make a deal “very badly,” but we have not heard about progress in the talks. Answering a question, Trump said that he is unlikely to stall the new levees on $267 billion.

At this point, there are quite a few signs that trade and growth are slowing down. US and German exports dropped while a growing chorus of companies and institutions talk about the postponement of investment decisions. On the other hand, the US is still enjoying upbeat growth.

And now, both leaders meet, with global stock markets watching very closely.

The level of uncertainty is high, but it seems that  a comprehensive trade agreement is not on the cards  and therefore does not appear as one of the scenarios.

Here are three scenarios

1) Gestures going only halfway, but something is better than nothing

In this scenario, Trump and Xi could hail the meeting as very successful and agree to intensify talks. The US would also pledge to either stop planning for additional duties on $267 billion of goods or from going forward with raising the duty on the current $200 billion worth of goods from 10% to 25%,  but not both: gestures that only go halfway. A total halt to new tariffs would depend on the negotiations and so will the lowering or removing of existing duties.

By going only halfway, Trump will win a good photo-opportunity while holding onto his  image as a tough dealmaker  and therefore the scenario has a  high probability. It would also help alleviate pressures from stock markets that Trump cares about so much.  Equities  are set to rise on the optimistic images coming out of the event but will hesitate to go very far as the threat of fresh tariffs still looms.

In currencies, we could see a  mild risk-on reaction. Commodity currencies could rise on the progress, especially the Canadian Dollar which is not as vulnerable like the Australian and New Zealand dollars. EUR/USD and  GBP/USD  could also move up a bit but return to focusing on Italy and Brexit respectively. USD/JPY has room for rises, but the safe-haven yen may find fresh demand if stocks fail to hold onto gains.

2) Trade Truce – Tremendous for trade and stocks

In this scenario, China and the US agree to refrain from hitting each other with new tariffs while negotiations continue. Such a step would  mimic the deal between the US and the European Union  struck in July. It would also be a considerable step forward after months of hostility.

Stock markets would rally  on the good news for global trade and the global economy. Commodity currencies, especially the Australian and New Zealand dollars, will likely shoot higher, dragging the loonie along for a ride. EUR/USD and GBP/USD may take a longer break from the domestic troubles and rise with all the boats.  USD/JPY  could also advance with shares and with the risk-on mood. The safe-haven yen will lose its shine.

The probability is medium  as such a move would trigger criticism from part of Trump’s base and from Peter Navarro, a lifelong China critic that has been sidelined ahead of the summit. However, seeing the Dow move higher would make Trump tremendously happy, and he will likely tweet about it.

3) Failure of the talks – Total tin-hat mode

Contrary to the scenario of a full deal which is not on the cards, a row between the presidents of the world’s largest economies cannot be ruled out.  The probability is low, but not zero. The disagreements and suspicion run deep. US Vice President Mike Pence expressed a long list of grievances against China in recent speeches, running well beyond trade.

If both leaders skip from holding a joint press conference that  silence will speak volumes in markets.

In this case, we will likely see a  full risk-off mood  amid growing fears of a global recession. Stocks could plunge and so could commodity currencies.  EUR/USD  and GBP/USD will likely suffer substantial losses, and only the safe-haven yen could come on top.

More:  Trade wars: Only a stock market crash can stop Trump, three reasons

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.