By Han Tan, Market Analyst at FXTM
Most Asian stocks and currencies are trading lower on Wednesday leading up to the long-awaited signing of the ‘Phase One’ trade deal between the US and China, amid concerns that major differences are set to persist between the two economic giants.
Hours before the trade deal is formalised in the White House at 17:30 CET, investors were met with headlines about potential plans by the US administration to block exports to Huawei, coupled with media reports that any further tariff relief may only go into effect after the US Presidential elections in November.
With the optimism surrounding the ‘phase one’ trade deal largely priced in, risk assets may be triggered into a knee-jerk reversal if the final details from the signed deal underwhelm investors.
Still, considering the diminished prospects of tariff escalation between the US and China, the global economy is expected to enjoy some measure of relief in 2020, having weathered heightened trade tensions over the past two years.
Should the macro data over the coming months point to a meaningful recovery in economic conditions worldwide, that should encourage further upside for riskier assets, with emerging-market assets poised for gains in such an environment.
Dollar sees diverging performance against G10 vs. Asian currencies
The US Dollar has seen a year-to-date decline against most Asian currencies but has strengthened against all of its G10 peers so far in 2020. Although the Dollar Index (DXY) remains above the psychological 97.0 handle, it is still expected to ease over the coming months, having posted lower highs and lower lows since October. This suggests a longer-term downtrend is in play, especially as investors with heartier risk appetites expanded their reach into the markets in the latter part of last year.
Further support for the dollar index may be drawn from the waning Pound, amid rising expectations that the Bank of England could lower interest rates this quarter, after dovish chatter from Bank of England Governor, Mark Carney and other MPC members over the last week.
Gold, Oil to see contrasting fortunes as economy recovers
Gold prices have retraced overbought levels and are finding a more stable footing around the mid-$1500s for the time being, with investors eager for details surrounding the expected rollback in tariffs. Bullion is expected to ease further if positive risk sentiment continues, while the global economy attempts to take advantage of thawing US-China trade tensions.
Brent is finding immediate support at $64/bbl, with concerns over the US-Iran conflict now reduced and with investors having mostly priced in the US-China ‘phase one’ trade deal signing. However, key details from the agreement that could significantly alter the outlook on global demand may yet hold sway over Oil’s performance going forward, with further indications over the reduction in tariffs pointing to more upside for Oil prices.
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