US-China phase one trade deal done at last

US and China finally inked the phase one trade deal as expected with fresh details few and far between, leading to the muted reaction within markets.

The ninety over pages of document had certainly been furnished with great more details compared to the December two-page fact sheet on items ranging intellectual property, trade to financial services concerns. That said, the broad strokes that continue to characterise some of the key items such as intellectual property protection and technology transfers remains the case.

While a breakdown of the $200 billion of additional imports from the US to China in two-years had been revealed with manufactured goods and agriculture goods to account for approximately 39% and 16% of the total imports respectively, the means to go about achieving such a significant uptick remains elusive. Enforcement had also been outlined within the agreement though the next steps had been kept relatively vague with no stated timing for further negotiations that could keep markets pining for updates. Odds are that we will only see a phase two trade deal post November’s US election, which also appeared to have been President Donald Trump’s preference. In the mean-time it will a wait-and-see for business confidence improvements or pick up reflected by business in the US to inject further optimism from a US-China trade perspective.

Some of the items perhaps carrying greater implication for the market in the near to medium term are the currency enforcement mechanism and China’s opening of its financial sector. After having been removed from the list of currency manipulator by the US, the latest agreement between the two countries reflected China’s commitment to market-determined exchange rate regime. At the same time, the bringing forward of China’s opening up of the domestic market to foreign financial institutions may also be a welcoming move if properly administered. While we have yet to see the slew of economic data into the end of the week including China’s Q4 GDP, this latest node in confirming some middle ground between the two sides nevertheless marks a positive sign.

Looking at USD/CNH which had been particularly sensitive towards the latest phase-one trade deal formulation coupled with the stabilization of economic data, prices had remained in a downtrend through Q4 2019 and into the start of the new year past 6.90. This level may serve as a near-term resistance for prices and a bullish scenario could potentially see prices back to the early 2019 lows of around 6.70, before things flared up again, if we do get expectations of further tariffs rollbacks down the road.

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