Currency markets are largely unmoved as the signing ceremony for a ‘Phase One’ trade agreement between the United States and China progresses in Washington…
The interim deal is designed to trigger a substantial rise in Chinese purchases of American goods and launch a number of structural reforms – in exchange for a small reduction in additional tariffs and an indefinite hold on new protectionist measures from Washington.
The dollar is stable, with domestic yields coming under pressure even as equity prices rise. Economically-sensitive currencies elsewhere are solidly range-bound, as foreign exchange traders idly monitor incoming headlines for surprises.
The 86-page agreement – which had yet not been released as we went to print – reportedly contains a commitment from China to purchase an additional $200 billion in US goods over a two-year period. Relative to levels that prevailed in 2017, $80 billion in buying would be allocated to manufactured products, $50 billion to energy, $35 billion to services, $35 billion to agricultural commodities.
President Trump has begun promoting the deal as a key plank in his 2020 re-election campaign, calling it “a big beautiful monster”, and his economic adviser Larry Kudlow claims it will add 0.5% to gross domestic product growth in 2020 and 2021.
But, although the two sides may have agreed to pause the shelling for now, low-intensity trench warfare will continue in the longer term. The agreement leaves most of the administration’s tariffs in place, with additional reductions unlikely before the November presidential election – and it does little to reform China’s state-led economic model. Forced transfer of American technology to Chinese firms will be discouraged, and intellectual property protections will be strengthened, but no limits are placed on government subsidies or on the lattice of regulations which protect homegrown companies from global competition.
In speeches ahead of the signing, President Trump claimed that talks on a ‘Phase Two’ deal would begin “shortly”, but market expectations for a second, more comprehensive agreement are, for all practical purposes, non-existent. Over the next year, China is likely to accelerate efforts to reduce its dependence on US markets and technology partners, injecting stimulus into the economy and providing more support to domestic champions. At the same time, a hardening public mood on both sides of the political aisle in the United States could yet translate into a renewal in hostilities against the Asian giant.
This suggests that market euphoria – reflected in lower implied volatilities and the rise of risk-sensitive currencies in the foreign exchange world – could fade over the coming weeks.