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US and China signs a deal to pause the trade war

The US dollar fell against major currency pairs including euro, pound, aussie, yen and yuan overnight as a ‘phase-one’ trade deal with China was finally inked.

This marks a major breakthrough in the 18-month trade negotiation and signals a temporary ceasefire between the world’s two largest economies.

Demand for safe-haven currencies fell as trade uncertainty faded, but equity markets are still facing a wave of ‘sell the trade fact’ activities, unwinding optimism built over the past two months.

The ‘phase-one’ trade deal includes stricter rules on intellectual property and China’s pledge to purchase at least US$ 200 billion US goods and services over the next two years on the basis of the principles of equality and mutual respect. US has also obtained China’s pledge not to manipulate its currency, which is viewed as a bullish signal for the CNH. Chinese leader Xi Jinping said the deal is ‘good for China, the US and the whole world’.

US will progressively remove tariffs on Chinese products upon reviewing the implementation of the trade deal. President Trump said that he will remove all US tariffs on Chinese imports after the completion of a phase-two trade agreement and no third-phase is expected.

USD/CNH retraced to 6.885 this morning from yesterday’s high of 6.905, and the offshore yuan may have more room to strengthen as both the trade deal and recent improved economic data points to a stronger currency. A strong currency, however, would dampen Chinese private manufacturers who rely heavily on exports. This may also expedite the trend of shifting low-end manufacturing factories to Southeast Asia, in which lower labour cost is a key advantage.

Market focus has now shifted to the implementation of the ‘phase-one’ deal. Although the signing of the deal paves way for a smooth start to a phase-two negotiation, market sentiment is going to be dominated by subsequent uncertainties; thus traders will have to be cautious on trade.

A survey released by the Federal Reserve yesterday showed that the uncertainty of US trade policy will eventually hurt domestic companies, with many manufacturers having to raise prices of final products due to higher tariffs on raw material. This will likely lead to lower profit margins and higher end-prices for consumers. UBS has previously expected that the Fed would have to cut interest rates three more times in 2020.

USD/CNH (1 Day)

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