If there is any deal between China and US over the coming weekend, we expect EUR/USD to rise.
The weakness in yuan and euro have been two of the most notable reactions to rising trade tensions. Any de-escalation of trade war rhetoric would have significant impact on the euro and Aussie dollar.
- Trump's meeting with Chinese President Xi Jinping may be underwhelming, but it could produce a set of principles that would start the process of bringing an end to the trade war.
- If we get that sort of event over the weekend, that should be good for risk assets next week in both US stocks and global equities.
- China and the eurozone have been big beneficiaries of globalisation and the existing trade regime, and it makes sense that their currencies have suffered this year as tensions have risen.
- As a result, any backing away from the brink will not only benefit both of these economies but will also lift their respective currencies. When added to a potentially less aggressive Fed, upside beckons in EUR/USD as does downside in AUD/USD.
- Here is our baseline scenario: If there is a deal, long EUR/USD; if not, short AUD/USD.
- Earlier this week, Fed Chair Jerome Powell said that the policy rate is “just below" an estimated range that neither provides stimulus nor slows growth.
Fullerton Markets Research Team
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