Ceasefire
Following talks in Switzerland over the weekend, a 90-day pause to Trump’s liberation day tariffs on China has been announced. The publication of a joint statement yesterday morning prompted heavy USD buying. The result of the negotiations is that for 90 days as of tomorrow, the tariffs imposed during Trump’s liberation day announcement and the micro escalations that followed, it will be forgiven for 90 days. That agreement leaves Chinese exports into the US exposed to 30% tariffs. Meanwhile, Chinese imports from the US will face a 10% tariff.
This was a more constructive outcome than most would have been expecting. There was a very real risk that the initial talks over the weekend would yield no progress. The median expectation, if it had been surveyed, would likely have been a mid-point between pre-and post-liberation day tariff levels. China was keen to see progress on interim tariffs before it allowed second phase talks to go ahead. What may have strengthened China’s hand in these initial talks is the evidence that exports to the US hadn’t fallen as much as expected despite the tariffs. This reinforces the narrative that tariffs on China may be serving more a tax upon US consumers rather than a hindrance to the Chinese economy.
The reasoning for the Euro’s advance following Trump’s liberation day was twofold. Firstly, any trade weighted observation of the Euro will be heavily (>50%) impacted by the Dollar’s value. Given that the Dollar itself was an obvious loser due to the build-up of risk premium, the Euro appeared comparatively stronger. As that risk premium has receded, so too has the trade weighted FX impact upon the Euro. Secondly, the Euro was one of the only currencies conjectured to have similar liquidity capacities to the Dollar. Therefore, it received an outsized bid upon the assumption/reality that it might take over ground from the declining Dollar. Yesterday’s press conference and statement is conclusive proof that trade induced risk sentiment is declining. Under such conditions, it should come as no surprise that the EURUSD forecast is declining.
Discussion and Analysis by Charles Porter
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