FX: Manic-depressive Mood On US-China Talks

*US-China soundbites drive knee-jerk reactions across the board
*S&P500 Futures round-turn early weakness
*AUD and NZD 1W implied volatility hit month highs 

Speak and we shall react says markets

The preamble of day 1 US-China trade talks has so far not disappointed. Not disappointed in the sense that if you were looking for US-China soundbites hitting the wires to lead to heightened volatility and a flurry of knee-jerk reactions - that's exactly what you got! For those who are a bit discombobulated and are wondering what the heck is going on, hopefully in this blog post we can clear up some of that confusion.

Headlines as they came out

As for a timeline, this is what we've seen so far starting with the earliest headline:
  • Around 6am AEST, South China Morning Post published an article that said "US and China make no progress on key trade issues in two days of deputy-level talks". It was an article heavily weighted in the negatives drawing attention to the Chinese delegation potentially leaving early and China's reticence to talk about core US grievances. - NEGATIVE
  • Around 9am AEST, digesting the news piece, Asia makes some sharp risk-off moves across the board at open. USDCNH +0.4%, USDJPY -0.4%, AUDUSD -0.3%, NZDUSD -0.2%, USDCAD +0.12%, S&P500 Futures drop 35pts -1.2%, ASX -0.8%. - NEGATIVE
  • Around 10am AEST, White House officials say SCMP report is inaccurate and that they aren't aware of any early departure. Markets partially retrace the earlier risk-off moves. - POSITIVE
  • Around 11am AEST, Fox News reports that Vice-Premier Liu He and his team are indeed leaving one day early. Markets are a bit confused but restart risk-off moves selling USDJPY, commodity bloc currencies and equity futures. - NEGATIVE
  • Sometime after midday AEST, headlines hit the wires that suggest "US is considering a currency pact with China in a partial trade deal" and "Trump will allow some US companies to supply Huawei". The positive tone drives strong risk-on moves across FX and equities. USDCNH touches 7.1. - POSITIVE
  • Around 1pm AEST, US Secretary of Commerce Wilbur Ross says that China's practices have "gotten worse". This takes the edge off the risk-on move and settles markets going into Asia close. - NEGATIVE

Indexed price performance (%, RHS) shows markets whipsawed between risk-on and risk-off as soundbites hit the wire

2019_10_10-Returns-(1).PNGReturns for each asset are based as of 10/10/2019. The X-axis is AEST. The Y-axis describes the % return of the asset i.e. 100.5 = 0.5%, 99.5 = -0.5%. Source: Eikon

How meaningful is what we've seen? 

For now, the trade optimists have slightly edged ahead of the pessimists. But it doesn't seem like we're any closer to a meaningful deal. That is, in reality, what's been said so far has been fleeting - easily forgotten or dismissed by the time the next headline comes around. So while USDJPY, USDCNH, the commodity bloc currencies and equity futures appear relatively settled after a whirlwind morning, smart money knows from history and experience that there's still plenty of water to go under the bridge. Both opportunities and risks will present themselves as trade anxiety drives whippy markets, so it'd be wise to stay cautious. A broad spectrum of potential outcomes come Friday night is still fair game but judging by how the last two years of negotiations have played out, risks lean to the downside and therefore continues to weigh on USDJPY and other risk assets.