Will the trade truce between the US and China give way to renewed conflict, peace or drawn out simmering tension? The result will determine in large part what happens to currencies in the Asia region
The FX view superimposes a dynamic trade story on top of a similarly directional story for the US Fed, resulting in three distinct periods for Asian FX:
1) An initial period of USD softness (Asian FX strength) in which markets were relatively calm and optimistic, arguably where we are now and have been since 1 January this year. This could be punctuated by a brief spell of even greater euphoria on a positively spun trade announcement before March.
2) This would then be followed by revision of both the trade and Fed views as lack of trade substance and labour market heat led to a rethink on both issues and Asian FX weakness.
3) A return to a softer USD view as fiscal stimulus ebbs, cumulative US financial tightening begins to bite and Chinese stimulus measures begin to bear fruit.
The view seems in reasonable shape a month on, though there are of course wobbles and the transition between phases one and phase two might yet see a no-trade deal announcement, in which case, the reversion to Asian FX weakness may be more brutal and miss out the ‘last hurrah’ which would require us to do some forecast trimming.
That said, at this stage, there has been no need to perform any radical surgery on the forecasts, with the notable exception of the Chinese yuan, which despite the ongoing macro disappointment, no longer looks as if it will break the 7.0 hurdle, and we have shifted the profile for the CNY lower.