CNY where there is smoke there is fire

Its been another eventful week in markets with the pinnacle being an announcement from China’s Ministry of Commerce yesterday afternoon that the U.S. had agreed to rollback existing tariffs as part of ongoing “Phase 1” trade negotiations, prompting a relief rally in risk assets.

As we have seen too many times in the past, it wasn’t long before headlines appeared that contradicted the earlier claims and resulted in risk assets promptly giving back a large percentage of their earlier gains.

However, in the face of growing evidence that the trade war is hurting both sides, there is perhaps reason to think where there is smoke there might also be fire.

A report from the Royal Bank of Canada released overnight shows that year to date through to September, U.S. imports from China have fallen to $345bn from $399bn, a -$54bn drop-off. U.S. tariffs are working as designed and the rate of decline in Chinese imports has accelerated in recent months.

On the U.S. side of the equation, a signed trade deal would provide the Trump administrations 2020 re-election hopes with a significant boost and a welcome win before possible impeachment by the House of Representatives.

Which begs the question, is there a market or markets where a tariff rollback would have more transparency than others? In this respect, the Chinese currency, the CNY is a good candidate.

Following the declaration of the U.S - China trade truce in early October, USD/CNY has fallen from near 7.15 to below 7.00 as the market has priced out the implementation of the last round of scheduled tariff hikes.

If yesterday's announcement from the Chinese Ministry is on point and there is a rollback of tariffs starting with the ones announced in early August and implemented in September, it would be logical to assume USD/CNY can unwind another chunk of its 2019 gains.

Pending a signed trade deal and a partial rollback in tariffs, this should translate into a break of key support near 6.9600 for USD/CNNY before a move back towards 6.8750, where it was trading July 30.

Source Tradingview. The figures stated areas of the 8th of November 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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