· The dollar held steady against most major currencies on Thursday as traders moved to the sidelines in advance of this weekend’s G20 summit where China and the United States may reach a truce on their trade conflict.
The world’s two largest economies have agreed to a tentative truce in their trade dispute, Hong Kong’s South China Morning Post cited sources as saying. U.S. President Donald Trump and Chinese President Xi Jinping are scheduled to meet on Saturday.
The report eased fears that Trump would impose additional tariffs on $300 billion on Chinese goods, but financial markets remain on edge about the trade talks, analysts and traders said.
Traders shrugged off a U.S. government report that showed the economy expanded at a 3.1% annualized pace in the first quarter, unchanged from the government’s estimate last month.
In late U.S. trading, the index that tracks the dollar against the euro, yen, sterling and three other currencies was little changed at 96.206, holding above a three-month low of 95.843 reached on Tuesday.
The index broke below its 200-day moving average last week, which analysts cite as bearish for the dollar, after the Federal Reserve signaled it was prepared to lower interest rates to combat the risk from global trade tensions and sluggish domestic inflation.
The dollar index was on track for it first quarterly loss since the first quarter of 2018. China’s offshore yuan rose 0.20% to 6.8742 per dollar , helping the renminbi back toward the six-week high of 6.8370 yuan per dollar touched last week.
The offshore yuan, however, has weakened 2.26% in the second quarter.
Whether Trump and Xi strike a trade truce this weekend could shape expectations on Fed policy in the coming months, analysts said.
Traders have priced in the probability the Fed would lower rates in July and might cut rates at least three times by year-end, according to interest rates futures calculated by CME Group’s FedWatch program.
· The yen edged up 0.03% to 107.755 per dollar. The Japanese currency has risen a solid 2.7% against the greenback in the second quarter, boosted by expectations of Fed rate cuts and the trade war.
Rising tensions between Iran and the United States has also stoked safe-haven demand for the Japanese currency.
· U.S. economic growth accelerated in the first quarter, the government confirmed on Thursday, but the export and inventory boost to activity masked weakness in domestic demand, some of which appears to have prevailed in the current quarter.
Gross domestic product increased at a 3.1% annualized rate, also driven by strong defense spending, the government said in its third reading of first-quarter GDP. That was unchanged from its estimate last month. The economy grew at a 2.2% pace in the October-December period.
Economists polled by Reuters had expected first-quarter GDP growth would be unrevised at a 3.1% rate.
The economy will mark 10 years of expansion in July, the longest on record. But momentum is slowing, with manufacturing struggling, the trade deficit widening again and the housing sector still mired in a soft patch.
· U.S. government debt prices fell Thursday ahead of a crucial meeting between the United States and China.
At around 3:09 p.m ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was lower at around 2.011%, while the yield on the 30-year Treasury bond slipped to 2.526%.
Market sentiment is largely driven by expectations that the United States and China will pause their trade war. The leaders of both countries are meeting later this week, on the sidelines of a G-20 summit in Japan.
President Trump said Wednesday that the meeting could lead to a trade deal but warned that he was prepared to impose tariffs on virtually all remaining Chinese imports if talks failed once again.
The South China Morning Post, citing unnamed sources, reported overnight that officials from Washington and Beijing had tentatively agreed to resume talks aimed at resolving the dispute.
· With less than two days before a high-stakes meeting between President Donald Trump and Chinese President Xi Jinping, one of the key issues that will be discussed is getting a balanced deal.
China believes any new agreement will need to be evenhanded, while U.S. Trade Representative Robert Lighthizer told his Chinese counterparts that balance won’t happen, according to a person familiar with the matter.
The reason why the U.S. will not prioritize balance is because of China’s past trade transgressions. Among other things, China has been accused of stealing U.S. technology.
· U.S. President Donald Trump said on Friday he will discuss trade with Japanese Prime Minister Shinzo Abe at their talks on the sidelines of a Group of 20 (G20) summit in Osaka, western Japan, as Washington pushes to cut its big trade deficit.
Trump said the two leaders would also discuss Japanese purchases of U.S. military equipment.
· Japan on Thursday cautioned the two candidates vying to replace Prime Minister Theresa May that a no-deal Brexit would be so disruptive for many companies that Japanese capital’s 35-year bet on Britain could end.
In an appeal to both Boris Johnson and Jeremy Hunt, Foreign Minister Taro Kono said Tokyo did not want a no-deal Brexit, that some companies were already moving out and that more investment could go.
· Oil prices inched higher on Thursday, kept in check by worries about whether the G-20 summit will produce a breakthrough on trade that could boost crude demand.
West Texas Intermediate (WTI) crude futures rose 5 cents, or 0.1%, to settle at $59.43 a barrel. Brent crude futures were last seen down 14 cents, or 0.2%, at $66.35.
· OPEC ministers meet Monday, but this weekend’s G-20 leaders summit could have much more impact on oil prices, depending on whether the outcome is good or bad for the global economy — and therefore oil demand.
OPEC, Russia and other producers are widely expected to continue with an agreement for a 1.2 million barrel a day production cut, originally agreed to last year. OPEC holds its market monitoring and ministerial meetings Monday, and then ‘OPEC+,’ which includes Russia and other producers, convenes Tuesday.
· Analysts mostly expect oil to trade above current levels for the balance of the year, with Brent prices expected over $70 a barrel, and WTI closer to $65. It could be a turnaround in the trade outlook that helps drive prices higher, along with the reduction in crude from Iran and other producers. Another factor hanging over the market is the potential for more events in the Gulf region, like the recent attacks on oil tankers and other assets that the U.S. blamed on Iran.
Reference: CNBC, Reuters
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