U.S.-China trade deal: Still trying to tap in – Westpac

Sean Callow, the Senior Currency Strategist at Westpac provided his view on the recent escalation of the U.S.-China trade disputes, which might keep a lid on the US Treasury bond yields, the Australian dollar and the USD/JPY pair.

• “It is just 2 weeks ago that a spokesman for China’s Commerce Ministry declared that the US and China had agreed to remove tariffs on each other’s goods in a phased manner. That day, the US 10 year Treasury yield rose as far as 1.97%. Showing the importance of trade relations, this was its highest yield since 1 August, which of course was the day that president Trump tweeted that the US would impose new tariffs from 1 September, accusing China of not delivering on promised purchases of US agricultural products and not stopping fentanyl shipments.
• That run towards 2.0% already seems a long time ago, with the 1.6% handle appearing to be the near term risk. We can’t blame the US economy for this reversal, with data flow such as retail sales not having much impact on yields. At the short end, Fed funds futures imply <5% chance of a 12 Dec rate cut, endorsing the Fed officials’ consistent line that the US economy does not need help from further easing this year.
• So the recent Treasury rally seems to reflect concern over the US economy beyond the short term and a resumption of flight to safety flows. There have been notable such movements on reports of further hurdles to a “phase one” deal. Only a week ago, WH advisor Larry Kudlow claimed the two sides were down to “short strokes”, implying a deal was close.
• It is hard to make such a case today, with news reports of a possible delay till at least the new year seeming more plausible. US Congress’s passage of the Hong Kong Human Rights and Democracy Act of 2019 added to market concern of a deepening rift between Washington and Beijing. But the biggest hurdles are probably the familiar issues of how far the US is willing to lower tariffs in return for China’s pledges on US agricultural imports and IP. In coming days, we look for such concerns to persist, capping UST yields, A$ and USD/JPY.”