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- Ceasefire period not long enough to bridge gulf
- Rally in 'China-sensitives' to peter out
- USD could gain if deal fails
Growing scepticism about the sustainability of the China-US trade war ceasefire is likely to increase risk aversion and support the Dollar, says an note to clients from Commonwealth Bank of Australia (CBA).
Analysts question whether the ceasefire announced over the weekend between the U.S. and China at the G20 summit is built to last, or merely a band-aid solution after parsing the detail of the detente agreed in Buenos Aires.
“We note an ever‑widening divide between the two groups interpretation of last weekend’s events – the latest being with respect to the auto industry,” says Richard Grace an analyst at CBA.
The Dollar has weakened and commodity currencies, as well as the Yuan, strengthened at the start of the new trading week after President’s Trump and Xi agreed a deal to implement a 90-day ceasefire in trade war escalation, at the G20 summit at the weekend.
The announcement came as a welcome balm to global stock markets, emerging-market currencies and China-linked currencies which have struggled in 2018 on the back of trade fears.
Wide differences still separate the two superpowers, however, making the ceasefire appear more fragile than initially supposed and this could have the effect of reversing the Dollar’s trend lower versus a broach of China-sensitive currencies including the Aussie, New Zealand Dollar and Yuan.
The most recent difference was highlighted after President Trump tweeted that China had agreed to reduce tariffs on US car imports, currently at 40%, yet no parallel response was forthcoming from Beijing.
The Dollar sits poised to gain if confidence in the deal continues to be rattled.
“USD appears poised to recover for the remainder of this week as optimism surrounding the ceasefire currency trade fades,” says Grace.
Analysts at Crédit Agricole are also sceptical about the longevity of the truce and have turned bearish the Australian Dollar.
Credit Agricole proposes a reversion of the dominant long-term downtrend in AUD/USD, with a new downside target of 0.7000, advising traders to place a stop loss at 0.7510.
The bank still sees a wide gulf separating the two superpowers on trade and the likelihood of them reaching a comprehensive agreement in only 90 days unrealistic.
The “US statement mainly speaks of concessions made by China (IP protection, agricultural purchases, Qualcomm-NXP among those) and China's statement doesn't mention any firm commitments,” says Justin Low, an analyst at Liveforex.com.
The detail of the two statements does indeed reveal notable differences in content and tone.
There was, for example, no mention of the 90 day grace period on escalation by the Chinese, only the US.
China agreed to ramp up purchases of US agricultural and energy commodities the US statement added the qualification that the increase had to be “very substantial”.
The American mentioned the Chinese were open to approving a deal between US chipmaker Qualcomm and Dutch rival NXP Semiconductors – something Beijing made no mention of.
The Chinese – but not the White House – said the two leaders would visit each other’s countries.
One major issue overlooked by markets is the wider geopolitical and strategic game being played by the two superpowers.
China is especially irked by what it sees as the US’s meddling in its internal affairs, including Taiwan.
The U.S.’s decision to sell $330m arms to Taiwan recently following a previous $1.3bn arms deal upset Beijing which views Taiwan as merely “a breakaway province that will inevitably be reunited with the mainland,” says Jeffrey Kucik, assistant professor of political science at the University of Arizona.
Kucik says the trade war has "grown to represent a deeper geopolitical rivalry."
Indeed in the two countries statements after the truce, the US remained silent in relation to Taiwan, while Beijing said the US would respect the ‘one-China policy’.
Xi Jinping is likely to expect Trump to compromise on complex territorial issues like Taiwan or the South China Sea before the ceasefire will begin to look like a full-fledged peace accord. Trump shouldn’t underestimate his rival’s stubborness in this regard.
“If Trump wants a win from this battle, he’ll need to understand that Xi won’t give in easily,” says Kucik, “ultimately, a meaningful, lasting deal is unlikely in the 90-day window.”
The South China Sea is a disputed resource-rich territory which China claims sovereignty over, claims the US does not recognise.
The Chinese have steadily built up a presence in the territory which has resulted in the US countering with their own navy warships.
The Chinese claim conflicts with the U.S.’s case that the area needs to remain open to freedom of navigation.
“These are different starting points and cannot be easily reconciled,” says Zhongping Song, a Hong-Kong-based commentator in an interview with the South China Post.
UBS Analyst Optimistic
Not all commentators are negative about the prospects of a more comprehensive trade deal growing out of the ceasefire.
Paul Donovan, chief global economist at UBS Wealth Management sees this as the first step to a better relationship. He sees more of an incentive for the US to do a deal as the negative economic effects of trade tariffs start to bite.
“At the end of the day the full cost of taxes on trade has not yet hit the US economy. So I think by having a truce it gives time for the existing tax increase to start to be felt which then perhaps prompts the US into coming up with a longer-term deal.” Says Donovan.
“To some extent, the US has the most to gain (from a longer-term deal) because what we have seen is the trade taxes have done enourmous damage to the US equity markets in the last couple of months and is the main reason for the equity correction..The Chinese equity market doesn’t matter to the Chinese economy as much as the US does to the US economy. And it also matters more politically,” adds the Economist.
“The impact of the trade taxes will become more visible to the US consumer at the end of the year increasing the political heat on the US administration to do something.” Concludes the UBS chief global economist in an interview with Bloomberg TV.
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