US-China Trade Deal Nearly Done

Deal Coming Soon

SPX500 rocketed to fresh highs yesterday in response to comments from President Trump.

The comments have fuelled speculation that the “phase one” trade deal agreed upon verbally on October 10^th, could now be signed imminently.

Trump told reporters outside Joint Base Andrews in Maryland yesterday:

“We are looking probably to be ahead of schedule to sign a very big portion of the China deal, we’ll call it phase one but it’s a very big portion.”

The President explained that the deal in question would “take care of the farmers” and “also take care of a lot of the banking needs.” He added:

“So we’re about I would say a little bit ahead of schedule maybe a lot ahead of schedule,”

China To Beef Up Farm Purchases

Media reports have noted sources saying that the discussions which took place on Friday last week saw China demand that the US cancel some of the current tariffs on Chinese goods.

This would be in exchange for committing to ramping up its agricultural purchases of US farm goods. The US is reportedly looking for China to commit to specifics regarding time and price for buying these items.

However, China is still looking to secure buyer discretion.

China Sounding Optimistic Also

Trump’s comments echo those of Chinese officials over the weekend who also said that the deal is moving along swiftly. They claimed that only a few final details are yet to be confirmed.

The mood in the markets this week reflects the level of relief among traders. This, of course, is thanks to the damage that the now 16-month trade war has wrought on the global economy.

Many central banks, as well as the IMF, have highlighted the damage caused by the tariff war. The war has prompted most G10 central banks to return to easing. It also caused the IMF to slash its global growth forecast this year to just 3%, the lowest level since the GFC.

So, with the two countries looking ever closer to signing deal, how much do we know about what is to be included?

The Deal

According to Bloomberg, the current “phase one” deal includes:

• A pause in tariffs escalation. The 5% increase due on $250 billion on October 15^th was suspended. However, the goods remain under a 25% tariff along with $110 billion of goods under tariff since September 1^st. The threat of a further tariff on $160 billion due on December 15^th remains. However, we can expect them to remove it in line with the deal.
• Concessions on intellectual property. The US is seeking to end systematic, state-backed Chinese appropriation of US intellectual property. While China has made commitments, these largely refer to actions that have already been taken. So, the US is likely to push for more.
• Commitments on currency. The two countries will agree on a bilateral commitment over exchange rates. This will likely see the US removing the “currency manipulator” label it applied earlier this year.
• Chinese commitments on US agricultural products. China recently resumed its purchases of soybeans and pork. However, it is set to double these purchases under the new deal.
• Purchases of other goods. China also set to commit to purchases of items such as US commercial aircraft and natural gas.
• The deal also lays out a dispute resolution mechanism. This is important as it means that China will be held accountable to ensure that it follows through on promises made in the deal.

Technical Perspective

USDCNH is sitting at a major support zone. Along with the structural support offered by prior lows between 7.0318 – 7.0484, price is also supported by the rising trend line from year to date lows. If we break below here, the next support zones to watch will be the 7.0055 and 6.9810 levels.