Watch for the dollar fade
USD bulls focused on accelerating fundamentals, strong corporate earnings and rising rates, and they were right. But negatives will catch up to the dollar in 2019. Surging public deficits and widening trade imbalances will increase the supply of USD-dominated assets and damage the value of dollar. Not to mention the chaos expected as President Trump and Democrat House go toe to toe, every day. The political gridlock will highlight the economic instability of the USA. Higher US interest rates have increased the cost of hedging USD exposure for international investors. Demand for the Euro should rise as the European Central Bank shifts toward normalization and yields rise.
US-China short-term breakthrough unlikely
There is a high likelihood that the meeting of US President Donald Trump and Chinese President Xi Jinping later this month won’t be game changing. The best-case would be that both leaders confirm their intent to maintain talks. The US’s latest request to China concerns 142 different items, with questions ranging from trade surplus to China mainland market opening, so this will require time from both sides. The request also raises the prospect of the US implementing further duties, currently valued at 10% of USD 200 billion and expected to reach 25% by the end of the year. Although the Chinese government is showing willingness negotiate, it appears less likely that a resolution will be met promptly. Accordingly, we expect the Chinese yuan to remain highly influenced by media announcements in the coming weeks leading to the Trump-Xi meeting.
