Dollar slightly higher, promising news from China on trade talks

Summary:

• US dollar leads the gains in the G10 basket in early European trading

• Both the US and China express “a will to work together in order to implement a consensus on trade”

• Stocks in Asia mixed following a positive session on Wall Street

Buck grinds higher

The US dollar is the strongest major currency in early European trading on Tuesday despite a miss in non-manufacturing ISM we were offered yesterday. Immediately after the reading the US 10Y yield jumped from 2.64% and ended the day subtly below 2.7%. This move helped buttress the greenback and this theme extended into Asian hours trading as well. The sole major currency being able to resist the buck’s strength is the Canadian dollar (up 0.2%) while the pound is treading water. In turn, the largest gain is seen against the Aussie (down 0.25%) following a disappointment we got from the trade data.

Australian trade data brought a lower than forecast trade surplus in November, but the details do not look so terribly. Source: Macrobond, XTB Research

Namely a trade surplus shrank in November and totalled 1925 million AUD compared to the previous month’s value of 2013 million AUD (a substantial revision down from 2316 million AUD). The November’s reading proved to be well below expectations pointing to 2175 million AUD. However, the details of this release look somewhat more encouraging as higher imports turned out to be the prime reason behind a lower surplus. It grew 2% MoM compared to a 3% MoM in October while exports increased 1% MoM, the same pace of growth was registered in October. This indicates that domestic demand in the Australian economy has not stumbled yet for all risks surrounding a trade battle between the world’s two largest economies.

The Aussie dollar has run into the supply zone placed nearby 0.7170 which could push the price to the lower level. While the buck is expected to weaken from the current levels in the months to come, we see only limited scope for Antipodean currencies to appreciate given their unattractive valuation compared to other currencies like GBP, SEK or NOK. Source: xStation5

Trade talks progress

Preliminary trade negotiations between the US and China began on Monday and are expected to last two days. Some reports (brought by the Chinese foreign ministry) from the first day of the event suggest that both sides are interested in hammering out a consensus on trade. Although this is only a verbal signal that that both sides are making headway in trade talks, it bodes well for the future when higher-level negotiations are expected to take place. Let us remind that the US and China have time to talks until a 90-day truce ends at the beginning of March. Stocks in Asia have traded mixed despite these comments with indices in Shanghai and Hong Kong being marginally down. The NIKKEI (JAP225) closed 0.8% higher while the Australian benchmark added 0.7%. Note that these results came after decent gains registered on Wall Street where the NASDAQ (US100) jumped 1.3% whereas the SP500 (US500) was up 0.7% and the Dow Jones (US30) rose 0.4%. The better result in US stocks could have been a response to a non-manufacturing ISM release. Admittedly it produced a miss in terms of a headline figure but the new orders subindex, everybody had been looking at after a tremendous decline in manufacturing new orders, remained comfortably above 62 points repelling risks of a severe economic slowdown.

The US500 is approaching its crucial technical resistance around 2600 points. This level may coincide with the 50DMA creating the hard obstacle for bulls. Source: xStation5

In the other news:

• There were no talks on a possible extension of the Article 50, Downing Street denies

• China ramps up US soybean buying, US firms are said to sell at least 11 cargoes on Monday as Bloomberg reports

• President of World Bank, Jim Young Kim, announced his resignation on Monday, the decision will take effect on February 1