US-China trade optimism: What goes up must go down?
Will the deal be done?
China announced a list of tariff exemptions on imports from the US while President Trump returned the move by delaying the next round of tariffs on China to October 15 from October 01. Furthermore, China is also considering US farm imports ahead of talks as a sign of goodwill. So far these gestures from both sides are just that, gestures. However, they are still important as any thawing in hostilities is sign of happier times ahead for both sides. From a macro perspective, Chinese list of tariff exemptions on Wednesday amounted to not much more than 1% of the total value of goods they have imposed tariffs on. So, in the big picture,it really is a good will gesture rather than a signifiant economic relief. Furthermore, reports yesterday suggest that both the US and China want to de-escalate tariff implications. The sense is that it's all got a bit serious, and folks want to walk back a bit from the edge.
So, the risk on rally continues...for now. Each time we have been down this road before the deal has broken down. In fact I would say that this is a reliable pattern of President Trump's. We saw it in the NAFTA(now USMCA) negotiations. The pattern goes a little like this:Threat, threat, threat then signs of a deal, silence, deal, threat , deal-off, deal then back on. Feeling dizzy yet?
And yet, there is something about President Trump that tells me eventually the deal will be done. This comes from the throw away lines that I have been picking up. I mean look at the reasons he gave for delaying the next round of tarfiffs on China to October 15 to October 1. Why? Because it was a gesture out of respect for the 70th anniversary of the Communist party. That's rather relational don't you think? This reminds me a bit of a family that argue all year round, and then _declare a truce for Christmas_. They do that because ultimately, they value each other (or at least aspire to). The cynics will say, he would say that wouldn't he, but this is not a one off throw away line. I am reminded of when Trump refrained from sending missiles to Iran over the latest flare up in the middle east - why? Because there was a chance that civilians got killed. At the end of the day, President Trump had an eye on the little guy and didn't want to crush him. The collateral damage of geo-politics mattered to him. Trump does not like war and even Trump's detractors acknowledge he does not want wars. That's a great attribute by me when we think of all the unnecessary lives lost to war in Iran, Iraq and Afghanistan over recent years.. Ordinary people, from all walks of life, found themselves thrown into a war that really was someone else's war and they did their duty by their country and died. I wouldn't say unnecessarily as they served their country or their family. However, I would say it is a good thing if war can, as far as possible (it isn't always), be avoided. Trump tries to avoid real wars.
So, President Trump has a relational side that will look for the deal. He is not looking for destructions, but deals. After all this is what business men do. Make deals.
However, don't get carried away. A leopard can't change his spots. His method of deal making is going to continue. Threat, threat, anger, threat, threat, talks of a deal, truce, threat, threat, more talks of a deal, anger, etc etc. You get the picture.
So, for us as traders we don't know if this will be the last cycle before a deal. However, we can be prepared. That preparation comes in the form of buying JPY if/and when the tweet of fire and fury comes. An AUD/JPY short is my pair of choice given AUD's close relationship with China's economy. So, you get a double whammy AUD weak and JPY strong. The further the risk rally continues, the harder it can potentially fall. You wonder what an opportunity Ivanka would have looking over President Trump's shoulder as he tweets out! You can see the real danger of insider trading must be massive for Trump's administration when you know one tweet rocks or rockets the S&P500. The mind boggles.