Intraday Market Thoughts

4 Spots to Watch in China-US Relationship

by Adam Button
Nov 21, 2016 0:39

We look at the different ways China and the United States are poised to drift apart in the four years ahead. CAD was the best performer last week while AUD lagged. CFTC data showed traders squaring up and cutting exposure. A new GBP Premium trade was issued on Friday, which will be discussed in Tuesday evening's open webinar.

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4 Spots to Watch in China-US Relationship - Eur Net Longs Nov 20 (Chart 1)

The relationship between two largest and most-power economies may define Trump's Presidency and will be an omnipresent risk. Here are the potential fault lines.

1) Free Trade

The APEC summit in Peru wrapped up on Sunday and China is clearly pursuing more trade deals and every country appears to want to move forward with a TPP that may exclude the US.

At the moment, it's clear that the US won't sign the TPP but what could happen is that a few largely-cosmetic clauses are re-worked and the deal is re-named so Trump gets to claim a victory, albeit a hollow one. This could be the strongest indication he isn't truly setting out to restructure US trade policy.

2) Economic Allies

Asian power appears to be gearing up for a future where the US pulls away from trade. Abe and Xi met on Sunday and Japan's leader said he wanted comprehensively closer ties with China and Xi was said to be impressed by the overture.

China may also build closer ties with Russia, Middle Eastern countries and Canada as it attempts to encroach on the US sphere of influence.

3) Currencies

Trump probably won't name China as a currency manipulator but record lows in the yuan are sure to be a sore spot and the rhetoric from Trump's side will probably be the first indication of how friendly he intends to be with Beijing.

4) Bonds

China is the second-largest holder of Treasuries after Japan but at the moment someone is clearly selling. Perhaps it's one of the Asian powers? We won't find out for months but Treasury-holdings data in the months ahead is must-watch economic news.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -119K vs -129K prior JPY +21K vs +32K prior GBP -80K vs -90K prior CHF -22K vs -23K prior AUD +42K vs +41K prior CAD -18K vs -21K prior NZD +2K vs +2K prior

The euro shorts have been paid off since the US election and they've used the drop to lighten up, but only marginally. Overall, the theme was to pare back exposure but not in a big way. We're a bit surprised that yen longs have pared even with bond yields moving up. That's a correlation that can't last.


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