No Magical Date

March 1st is no magical date
Said Trump, while investors fixate
On whether a deal
On trade will be sealed
By then, or if tariffs can wait

After a day where there was mercifully little discussion of the ongoing trade negotiations, they have come back to the fore. Yesterday, President Trump indicated that the March 1st deadline for a deal was now far more flexible than had previously been indicated. Based on the reports that there has been substantial progress made so far, it seems a foregone conclusion that tariffs will not be rising on March 2nd. However, key issues remain open, notably the question of forced technology transfer and IP theft. Of course, as the Chinese maintain that neither one of those things currently occur, it is difficult for them to accept a resolution and change their methods. On the flip side, both Trump and Xi really need a deal to remove a major economic concern as well as to demonstrate their ability to help their respective nations.

One of the things that appears to be on the agenda is a Chinese pledge to maintain a stable yuan going forward, rather than allowing the market to determine its value. Looking back, it is ironic that the IMF allowed the yuan to join the SDR in 2016 to begin with, given that it continues to lack a key characteristic for inclusion in the basket; the ability to be “freely usable” to make payments for international transactions. And while the PBOC had been alleging that they were slowly allowing more market influence on the currency in their efforts to internationalize it, the results of the trade talks seem certain to halt whatever progress has been made and likely reverse some portion of it. It should be no surprise that the yuan strengthened on the back of these reports with the currency rallying 0.8% since yesterday morning. If currency control is part of the deal, then my previous views that the renminbi will weaken this year need to be changed. Given the continued presence of financial controls in China, if they choose to maintain a strong CNY, they will be able to do so, regardless of what happens in the rest of the world.

Meanwhile, away from the trade saga, the ongoing central bank activities remain the top story for markets. This has been made clear by comments from several central bankers in the past 24 hours. First, we heard from Cleveland Fed President Mester who, unlike the rest of the speakers lately, indicated that she expects rates to be higher by the end of the year. her view is that 3.00% is the neutral rate and that while waiting right now makes sense, the growth trajectory she expects will require still higher rates. However, while the FX market paid her some attention, it is not clear that the equity market did. Two things to note are that she is likely the most hawkish member of the Fed to begin with, and she is not a voting member this year, so will not be able to express her views directly.

Remember, too, that at 2:00 this afternoon, the FOMC Minutes of the January meeting will be released. Market participants and analysts are all very interested to see the nature of the conversation that led to the remarkable reversal from ‘further rate hikes are likely, to ‘patience is appropriate for now’ all while economic data remained largely unchanged. Until that release, most traders will be reluctant to add to any positions and movement is likely to be muted.

Across the pond, ECB Member Peter Praet continues to discuss the prospect of rolling over TLTRO’s which begin coming due in June of next year. Remember, one of the key issues for the Eurozone banks who availed themselves of this funding is that once the maturities fall below one year, it ceases to be considered long term funding and impacts bank capital ratios. Banks will then either have to call in loans that were made on the basis of this funding, or raise loan interest rates, or see their profits reduced as they pay more for their capital. None of these situations will help Eurozone growth. So, despite claims that banks must stand on their own, and TLTRO’s will only be rolled over if there is a monetary policy case to be made, the reality is that it is quite clear the ECB will roll these loans over. If they don’t, it will require the restarting of asset purchases or some other easing measure.

Once again, I will highlight that given the current growth and inflation trajectories in the Eurozone, there is a vanishingly small probability that the ECB will allow policy to get tighter than its current settings, and a pretty large probability that they will ease further. This will not help the euro regardless of the Fed’s actions. Yesterday saw the euro rally on the back of the updated trade story, but that has been stopped short as the market begins to accept the idea that the ECB is not going to tighten policy at all. Thus, this morning, the euro is unchanged.

The final story of note is, of course, Brexit, where the most recent word is that PM May is seeking to get a subtle change in the EU stance on the backstop plan thus allowing a new vote, this time with a chance of passing. The pro-Brexit concern is that the current form of the backstop will force the UK to be permanently attached to the EU’s trade regime with no say in the matter, exactly the opposite of what they voted for. May is meeting with EU President Juncker today, and it is quite possible that the EU is starting to feel the pressure of the ramifications of a no-deal Brexit and getting concerned. The Brexit outcome remains highly uncertain, but the FX implications remain the same; a Brexit deal will help the pound rally initially, while a no-deal Brexit will see a sharp decline in Sterling. Yesterday there was hope for the deal and the pound rallied. This morning, not so much as the pound has given back half the gain and is down 0.2% on the day.

Elsewhere, the dollar has been mixed with gainers and losers in both the G10 and the EMG blocs as everybody awaits the Minutes, which is the only data for the day. It is hard to believe there will be much movement ahead of them, and afterwards, it will depend on what they say.

Good luck
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