By Orbex
US/China trade relations remain center-stage this week as traders continue to try and gauge the proximity of a trade deal.
The US had been pushing for a deal to be signed at the APEC meeting in Chile over the weekend. However, given the recent outbreak of social unrest in Chile, the Chilean president canceled the meeting. Consequently, the trade deal was put on hold with both sides agreeing to establish a new date and venue.
Traders took the news of the cancellation well, given the fragile nature of US/China relations.
Equities prices have been well supported over the week. The SPX500 is continuing to trade into fresh record highs. Over the weekend, high-level officials from the two countries engaged in further talks which were noted to be “constructive”.
A statement released by the Chinese commerce ministry following the talks noted:
Free Reports:
“The two sides have engaged in constructive discussions around the respective core concerns of the first phase of the agreement and will continue to maintain close communication.”
Speaking with reporters ahead of the weekend’s talks, US Secretary of Commerce Wilbur Ross said that the “phase one” trade deal will likely be “relatively limited in scope.”
He went on to say that it focuses mainly on the Chinese commitment to purchase between $40 – $50 billion of US agricultural products.
Despite the optimism around the deal, risks still remain.
China has been pushing for the US to agree to roll back existing trade tariffs as part of the deal. However, Trump has so far adamantly refused to roll back tariffs.
That being said, Trump has stated that if a deal is done ahead of December 15th, he will cancel the next wave of tariffs to be applied to $156 billion of goods.
The issue of the tariff roll-backs could prove to be a stumbling block for the talks.
CNBC reporter Eunice Yoon noted that a government source in China said the mood regarding the deal was pessimistic. According to the source, China is potentially considering holding off on signing a deal thanks to the uncertainty of the outcome of Trump’s impeachment proceedings.
Additionally, there is still some disagreement regarding the specific level of agricultural purchases by China.
If the mood in China is pessimistic, this is certainly not being felt around the globe.
Equities prices have been broadly higher again this week. For now, it seems that traders are happy in the view that a deal will be done over the coming weeks.
Given the recent drive higher in US equities, however, there is still plenty of room for a sharp downside correction on any disappointment. Talks have unexpectedly broken down out of the blue before. And, if disagreement remains over key issues and China is dragging its heels, Trump could very well react badly and announce further tariffs.
USDCNH has recovered firmly off the 6.9614 – 6.9802 support zone. However, it has yet to break back above resistance at the 7.0474 level. While below here, focus remains on a further grind to the downside with 6.8999 the next key level to watch.
By Orbex