Sentiment lifted by Brexit deal and trade war hopes
(14 October 2019 – Global) Hopes of a successful US-China Trade War resolution along with a possible Brexit deal have buoyed markets and improved sentiment for several currency pairs linked to the outcome of both critically important geopolitical events.
US President Donald Trump announced ‘phase one’ of a new trade deal with China, the first breakthrough in negotiations since the tariff tit-for-tat battle erupted in early 2018. The agreement has raised hopes the countries will reach a final, more significant, deal in coming months. President Trump said the hostile relations between the countries had become a ‘lovefest’. The Trump administration agreed to cancel a planned tariff increase on US$250 billion in Chinese goods while China will buy up to US$50 billion worth of US agricultural products and is prepared to agree to guidelines on how it manages its currency. Trump said the deal also included some provisions on intellectual property and would open up China’s market to American financial services firms.
Positive reports from US-China talks are particularly focused on the potential for a currency pact between the two nations. An FX pact would potentially see the USD weaken and the Chinese yuan gain according to Western Union Currency Strategist APAC Steven Dooley. A constructive result to ongoing trade negotiations, now surpassing the thirteenth round of official discussions, could see the Aussie Dollar recover from recent selling. Chinese officials took some key issues off the table for upcoming trade talks commencing October 17. Vice Premier Liu He, who is leading China's delegation in negotiations, reportedly has said his proposal will not include Chinese industrial policy or government subsidies.
In the United Kingdom (UK), a strong positive appraisal of UK and Irish talks added to the improved global sentiment. The UK and Irish border has been a major sticking point in Brexit talks. The GBP jumped on the news with the AUDGBP falling 1.5 percent to H2 2019 lows. The UK and European Union signalled a Brexit deal is in sight, with negotiators heading into three days of intensive talks in Brussels. On Friday, EU officials said that British Prime Minister (PM) Boris Johnson had indicated he was prepared to make sufficient concessions to allow detailed talks to begin. Teams from both countries are working to confirm if they can reach an accord ahead of a summit of EU leaders beginning October 17.
GBP posted its biggest two day gain since 2009 and UK bank share prices jumped strongly however the UK and EU cautioned that much work remains to be done if Britain is to leave the EU by PM Johnson's October 31 deadline. There is however a growing belief among pro-Remain MPs that they can secure a second EU referendum next week as doubts grow that PM Johnson has enough support within parliament to force through any deal he returns home with from Brussels. UK PM Johnson is prepared to go to the Supreme Court to challenge a law requiring him to ask the EU to delay Brexit if an agreement is not reached by the deadline while French President Emanuel Macron has urged Johnson to work swiftly with EU negotiators to reach a deal this week.
“The UK hasn't yet come forward with a workable, realistic proposal but we have seen promising signals” stated European Council President Donald Tusk.
Irish PM Leo Varadkar said a transitional agreement allowing the UK to withdraw from the EU in an orderly manner can be reached by the October 31 Brexit deadline. Varadkar made the statement after what he described as a positive meeting with British PM Boris Johnson.
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