Trade War Truce Impacts Forex Pairs

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Trade War Truce Impacts Forex Pairs

After months of trading hostilities between the US and China, the two global economic heavyweights finally reached a truce on Saturday. During sideline talks at the G20 Summit, presidents Trump and Xi agreed to suspend the retaliatory tariffs for 90 days to allow for negotiations.

In a press release, the White House stated that the US had managed to coerce China to reduce the trade deficit by buying more US goods and reign in on unscrupulous trade practices.

In return, the US had committed to suspend the tariffs stated for January 1 to facilitate negotiations. The statement stated that the tariffs would be implemented if the two sides failed to reach an agreement.

The Effect On US dollar

Some Experts had predicted that the easing of tension between the two countries would strengthen the dollar and improve the valuation of Asian stocks. However, the immediate effect of the truce has been the weakening of the dollar and the Yen as investors increased appetite for risky assets.

Indeed, it was the volatile currencies such as the Aussie and Kiwi dollar that recorded the most improvements while stable currencies such as the Yen weakened.

The dollar index relative to six major currencies had already fallen by 0.36% to 96.92 by Monday morning. The US dollar lost to the Yuan, the Rand, and the Mexican peso while the Yen hit a new low of 113.85 against the dollar. Meanwhile, the Euro gained 0.3% against the Yen and the dollar to trade at 128.84 and $1.1350 respectively while the Sterling pound gained marginally against the dollar.

Experts attribute the risky trading behaviour to the fact that currency investors no longer see the dollar as a safe bet. Traders now view riskier currencies such as the Kiwi and the Aussie as holding better short-term prospects. They predict that crosses involving the Yen for the Aussie and the Kiwi will record increased activity as traders absorb the implications of the truce. This tread is likely to continue as traders shun the dollar for less liquid currencies that are likely to be stable in the short term.

U.S and China Trade Truce Market Consequences

Trade War and sanctions Talking Points:

  • Growth slowdown in Europe may push ECB towards a dovish stance
  • Potential Trade war truce quadruples MSCI
  • Maduro regime may potentially be pushed out by overwhelming sanctions

With Thursday’s ECB meeting and the German economy facing a slowdown, the truce might push the economy down further. The MSCI shows great promise as new foreign capital is injected, bringing the yuan to its highest level since July. Venezuela continues to suffer from sanctions as the Maduro regime holds on for dear life.

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EUR/USD Hitting 13-Day Moving Average

U.S and China Trade Truce Consequence

With the ECB soon coming together for their meeting in Frankfurt, it seems more likely that there will be a dovish stance since the European economy has been negatively affected by the US and China trade war.

There’s a high likelihood that president Trump and President Xi Jinping will reach an agreement, which will impact many countries. The agreement would involve an increase in U.S product purchases, which as a result, would mean less exports from other countries. For instance, economists at Barclay have stated that they estimate a 20% decrease in exports to China. For Europe, that would mean that they would see an estimate of 2.2% drop in their exports. With Germany already struggling with demands, this will negatively affect their economy and a factor that contributed to today’s 0.40% drop in euro. As shown in the graph above, the EUR/USD price is at its 13-day moving average. If the price moves lower past the moving average, this may lead to a potential downward trend.

MSCI Plans to Quadruple China’s Weighting

The extension deadline given by president Trump to make a deal with China encouraged foreign capital inflow, which is why the yuan has grown stronger with an open price of 6.7, highest it’s been since July.

CNY Opening Strong for 2020

With uncertainty decreasing and the outlook being positive between the U.S and China, the yuan may continue to appreciate. As a result of the potential trade truce, the MSCI has experienced its greatest gain since last week due to potential foreign capital inflow. MSCI has stated that it expects 80 billion new foreign funds to flow in. The global index plans to increase Chinese large cap stocks to 20% from 5% and increase the weight of Chinese stocks from 0.7% to 3.3%.

However, the growth prospect of the yuan may change by the end of the year since China does not have the same stability as the U.S. The increase in new yuan loans has increased debt further leading to a higher debt-to-GDP ratio. As mentioned in my previous article “ How to Know If You Are Invested in the Right Emerging Market ”, a debt-to-GDP ratio exceeding 4% is a sign of danger and should be a reason for concern.

Geopolitical Update

The president of Venezuela’s central bank, Calixto Ortega seemed to be missing for weeks and it was later found that he had left the country discretely to buy some time. He tried to negotiate with Venezuela’s allies in order to bring forth some funds to survive against the sanctions. With 90% of their economy relying on crude oil and U.S accounting for approximately 41% of their exports, there’s a low probability that they will be able to have enough funds to cover their crisis. This may finally push the Maduro regime out.

Written by: Nancy Pakbaz, CFA

Follow Nancy on Twitter @NancyPakbazFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

What are the best forex pairs to trade?

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All pairs are good for trading. Depends what type of trading you prefer.

There are huge amount of currency pairs, but most popular are majors.

EURUSD – is good for lazy intraday trading. This pair gives clear signals, but sometimes volatility is low. So in calm day, catching 30-50 pips is good.

GBPUSD – have good intraday volatility, and this pair like swinging. If you want to participate in the market whole day and catching more profit, this pair will give it. GBP will give you more time to worry about orders than EUR, but it can give more profit.

USDJPY and USDCAD – are almost same as EUR and.

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