While attention is mainly directed towards Europe given the keenly anticipated ECB meeting tomorrow, as well as news that Boris Johnson is now the new UK Prime Minister, the US/China trade story is about swing back into the spotlight.
US Delegates Head to China
A team of US trade delegates is reportedly due to fly to Shanghai next week to re-open trade talks with Chinese officials. These talks will be the first since the Trump/Xi meeting at the recent G20 summit. These will also be the first talks since negotiations broke down in May.
Market Remains Hopeful
Optimism, in response to news of a successful meeting between Trump and Xi in Japan last month, was clearly visible in asset markets. US equities surged to fresh highs. Tensions had been boiling over prior to the meeting between the two leaders. Both countries were engaged in a fresh round of tit-for-tat tariffs as well as other hostilities.
Groundwork In Place
US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin have spoken with their Chinese counterparts earlier in the month to lay the groundwork for the talks. While there is optimism over these fresh efforts to deliver a deal, there are still plenty of key issues causing division such as laws around intellectual property and the forced transfer of foreign technology.
IMF Downgrades World Growth
The latest IMF update released this week has highlighted the urgent need for a resolution to the situation. In its half-yearly World Economic Outlook, the IMF projects global growth to be 0.1% lower in both 2019 and 2020 than it forecast last time around. Now, forecasts are 3.2% and 3.5% respectively.
IMF: China Hurt More Than US
The report did, however, endorse Trump’s claims that the trade war has hit China harder than the US. The report’s country-by-country breakdown showed an upgraded forecast for US growth this year. US growth increased from 2.3% to 2.6%. On the other hand, it was a downgraded forecast for China. Growth was expected to move from 6.3% to 6.2%.
Commenting on China in the report, the IMF said:
“In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt.”
IMF Warns US
Despite the upgraded US growth forecast, the IMF did have a message of warning for the US. They said that “Multilateral and national policy actions are vital to placing global growth on a stronger footing.”
They further said:
“The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements (including between the UK and the EU and the free trade area encompassing Canada, Mexico, and the US). Specifically, countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms.”
USDCNH has ground to a halt over recent weeks as the market awaits new updates on the first set of trade talks to take place. Interestingly, USD has weakened against CNH since trade talks collapsed in May. However, we have seen a recovery of around 50% since the June lows.
For now, USDCNH remains hemmed in between support at the 6.8182 level and resistance at the 6.8982 level. A topside break will put the focus back onto 6.94812. On the other hand, a move to the downside brings 6.7484 into play next.