G-20 summit: Don’t count on Trump/Xi – Nordea Markets

According to Andreas Steno Larsen, research analyst at Nordea Markets, all eyes will be on the G-20 summit starting today as the USD vs. Asian FX has stabilised, which likely reflects either i) expectations of a postponement of US tariffs on Chinese exports, or ii) Asian central banks using FX reserves to prevent further local currency weakening.

Key Quotes

“Currently USD/CNY has picked up roughly 10% since the trade war started  in the spring (roughly reflecting a 10% tariff rate).  What if Trump goes on and delivers on the 25%  tariff rate from 1 January 2019? We remain sceptical of progress being made this week.”

“There are two outcomes in case of a 25% tariff imposed on Chinese exports. Either i) USD/CNY (or USD/ASIA) picks up to counter the effect of the tariff, or ii) US inflation will be pushed substantially higher due to the tariff effects. Both are ultimately USD positive scenarios,  which is why the only USD negative scenario is an outright postponement of the tariffs.  A softening of the trade war is likely a prerequisite for the broader USD development to turn negative.”

“Currently  the USD is sufficiently strong against Asian FX to add downside risks towards 2% in US core inflation  over the next 2-3 months.”

“We have been arguing for a while that US key figure momentum could drop faster than the Euro-area ditto. The tightening of Asian financial conditions (driven by the trade war and tighter US monetary policy) has so far had the biggest negative impact on the Euro area. However, lower oil prices will likely have a bigger negative impact on the US due to a deteriorating CAPEX cycle.  On the margin, US momentum may drop faster than the Euro-area ditto, but leading indicators continue to point south on both sides of the pond.”