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Analysts at ING are assuming that something will happen before Friday morning’s deadline to raise US tariffs on USD 200bn worth of Chinese goods to 25% from 10%.

Key Quotes

“By the looks of it, financial markets are a little more concerned that the ‘reneging’ allegations against China from president Trump’s trade team are a little more serious than last-minute fine-tuning.”

“Albeit seemingly small, there is still a chance that US-China trade relations are not back on track by Friday morning. The imposition of higher US tariffs (even for the short term) would un-nerve global FX markets. Even if the PBOC were to continue fixing USD/CNY near today’s 6.76 fixing level, the onshore could press the 2% daily limit near 6.90 and USD/CNH could trade 6.94. USD/CNY retesting the 7.00 level was certainly not in the 2019 investment script.”

“Given trade linkages, we would expect emerging market and pro-activity currencies in the G10 space to come under pressure. Checking year-to-date correlations with the CNY (we look at daily changes versus the USD), the familiar suspects of the KRW, ZAR, IDR, CAD and NOK would look most vulnerable to more surprise weakness. And looking at betas both for this year and during last year’s CNY sell-off, a similar mix of currencies is seen as well.”

“Clearly, the lack of correlation with the CNY is a distinct advantage for the JPY right now, but also for the dollar, which should stay bid if emerging FX were to come under increasing pressure.”