RumbleON : Trade Deal ‘Phase 1’ – How important is it and how are the markets reacting?

The currency markets have had a slow start to 2020 despite a huge upheaval in geopolitical tensions. We expect sleeping giants to awaken in the not too distant future, but for now, this article will focus on 'Phase 1' of the US/China trade deal, its impacts and how to interpret it.

What are the main concerns?

Essentially, Phase 1 provides a staged de-escalation of the trade war to appease global market tensions and assure big businesses that conversations are moving in the right direction. In addition, having these talks conveniently held ahead of US Presidential elections in November is certainly no coincidence, with Trump wanting to prove his deal-making credentials in his pitch to voters for a second term. However, with a lack of concrete evidence and the knowledge that the more complex negotiations have been assigned to Phase 2, the markets may well pick apart the progress rather quickly and cynically. If that is the case, whilst the USD has started well this year, it may become an easy target to sell-off.

For business leaders across the globe, from all industries and sectors, there is an air of scepticism forming over the 'Phase 2' element of the trade deal. Perhaps they are jumping the gun, but, in reality, the complications of further negotiations are likely to leave existing tariffs in place for another year at the very least. Trump's imposing of tariffs and the retaliation from China have left global import costs ticking higher, with imports from China now receiving an eye-watering 21% tariff versus 3% previously - this leaves global trade flows miles from its historical norms.

The dwindling volatility could be partially blamed on the lack of information currently available to investors and traders. The White House has yet to release any of the agreement in text format, leaving plenty of guesswork for businesses and financiers to wait on. US farmers will be hoping to start 2020 positively; particular those farming Soybeans, with China expected to buy up to 50 billion dollars' worth of agricultural products as part of the deal. As farmers and those in rural agricultural areas made up a large part of Trump's voting base; without agreement on this, the deal will likely stall and the chance of starting Phase 2 talks in the nearer term disappears.

What you can do to mitigate risk

With all this risk and uncertainty comes a prudent opportunity to think about hedging strategies for each quarter in 2020. At WorldFirst, we have the ability to book both fixed and windowed forwards, giving our clients the benefit of interest rate points, in some cases edging them above the spot market for their buying and selling. Please contact us for further information.

We are also working to increase UK and China business functionality, such as supplier and invoice payments and local currency accounts for collection. We will be exhibiting at Alibaba's 'Unlocking the China Opportunity' in London this week where hundreds of British business leaders will have the opportunity to meet with businesses and organisations such as Alipay, the China-Britain Business Council and, of course, WorldFirst. You can find more information and register for your space here.

Key Major Currency Moves

As a reference point, year to date:

• USDCHF has gained 1.20%
• USDJPY has gained 2.00%
• USDCAD has gained 1.20%
• USDAUD has gained 2.60%
• USDCNH is down 1.30%
• GBPUSD is down 2.42%

Author: Alistair Hutson, Private Dealing Manager WorldFirst, and the WorldFirst Commercial Team

Whilst every effort is made to ensure the information published here is accurate, you should confirm the latest exchange rates with WorldFirst prior to making a decision. The information published is general in nature only and does not consider your personal objectives, financial situation or particular needs. Full disclaimer available online.