A wild night in currency markets saw the United States dollar weaken as China appears prepared to offer Donald Trump a trade war olive branch in the form of a limited trade deal to buy more pork.
The euro and British pound rose against the USD, while the Japanese yen sold off amid a global risk-on rally in stocks.
US Dollar Drops as China Offers Trump a (Partial) Deal
The Trump administration appeared to do everything in its power to start trade talks off on the wrong foot on Tuesday, with several bans and blacklistings. However, it seems that China’s large delegation of officials has a mission to get a deal done.
The weak performance of the Japanese yen was perhaps the most telling reaction in foreign exchange markets, as the haven JPY dropped 0.3% against the dollar and 0.5% against the euro. The trade war barometer (USD/CNH) dropped, as a stronger offshore yuan helped boost sentiment around the globe.
Adding to the pressure on the USD is the upcoming release of the FOMC minutes, which are widely expected to confirm the Fed is still in full easing mode.
Analyst: USD/JPY Strength Unlikely to Persist Amid China Uncertainty
Boris Schlossberg, managing director of currency strategy at BK Asset Management, had the following to say about the moves in the dollar overnight. The strategist noted that currency traders should be cautious about labeling China’s interest in a limited agriculture deal as a concession, writing:
“USDJPY and yen crosses saw a rally as risk recovered on headlines that China was still committed to a limited trade deal focusing primarily on agriculture. Although the move appears to be a concession on the part of China, it is actually full of self-interest. Swine flu has wiped out more than 50% of the Chinese pig population and the country is facing much higher prices as a result wreaking havoc amongst the common population where pork is major staple food.”
Ultimately, this leads Schlossberg to the conclusion that today’s trade headline doesn’t change very much and that USD/JPY is unlikely to find too much relief in the short term.
“China is more than willing to engage in agri-trade while still maintaining a barrier to technology and intellectual property issues… USDJPY remains capped below the 107.50 for now as markets try to ascertain the true state of negotiations.”
Pound/Dollar Rises on Brexit Deal Hopes Before Sharp Reversal
Adding to the pressure on the US dollar, the British pound shot higher in European trade on reignited hopes that the EU might be prepared to make a deal on Brexit.
Sterling continues to trade slightly higher, however, as it is being lifted on the tide as the euro rallied against the dollar (EUR/USD) amid a strong bounce in European stock markets.