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Fed Hike Bets Overshadow China US Auto Tariff Cut, AUD/USD at Risk

Fed Hike Bets Overshadow China US Auto Tariff Cut, AUD/USD at Risk

Daniel Dubrovsky, Strategist

Asia Pacific Market Open – US China Trade Talks, Stocks, Fed, US Dollar, Huawei, AUD/USD

  • US China trade war fears ebbed, pushing European equities higher as S&P 500 gapped higher
  • Upside momentum in Wall Street fell apart as Fed rate hike bets increased, USD little changed
  • Huawei situation improves, but will gains in AUD/USD last if stocks trim upside gaps again?

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Despite a recovery in European benchmark stock indexes on Tuesday, US ones struggled to keep up the pace and finished the day little changed. Gains in the former occurred following uplifting US China trade news from the Asia trading session, resulting in gaps to the upside in the DAX for example. Then, momentum picked up as China increased aggregate financing amidst slowing growth.

Lately, the world’s second largest economy has been taking actions to tame debt levels, but the government is slowly caving in to adding more stimulus in an effort to boost growth. Then, stocks were further lifted in Europe as China announced a cut in US auto import tariffs. This suggests that the two are perhaps getting closer to a trade agreement during the 90-day ceasefire created after the G20 Leaders’ Summit.

The S&P 500 gapped more than 1.2% higher at market open, clearly benefiting from the improvement in risk trends as a result. So why did it then close 0.04% lower after paring its gap? Well, Fed rate hike expectations improved not only for next week’s announcement, but for 2019 as well. Indeed, US government bond yields rallied as reduced US China trade war fears makes for a clearer tightening path.

That may have been the reason, but the US Dollar only traded cautiously higher. This was perhaps due to declines during the Asia and European trading sessions. The British Pound was once again the worst performing major. Rumors have been circulating that enough letters have been submitted to trigger a ‘no confidence’ vote for UK Prime Minister Theresa May. This creates further uncertainties for Brexit talks as the deadline to leave the EU quickly approaches.

As the markets transitioned into Wednesday’s session, reports crossed the wires that Huawei’s CFO Meng Wanzhou was granted a bail by a Canadian judge. Since the CFO was arrested, markets interpreted it as complicating US China trade talks and were left fragile. Less than an hour later, US President Donald Trump said that he could intervene in the Huawei case if it aids a China trade deal.

As these updates crossed the wires, S&P 500 and Nikkei 225 futures edged higher. Meanwhile the anti-risk Japanese Yen weakened and the pro-risk Australian and New Zealand Dollars rose. While this could result in gains in Asia Pacific benchmark stock indexes, an improvement in US China trade talks can lead to hawkish Fed policy expectations down the road. This may continue pressuring AUD/USD and AUD/JPY towards key support areas and equities may trim gains.

US Trading Session

Fed Hike Bets Overshadow China US Auto Tariff Cut, AUD/USD at Risk

Asia Pacific Trading Session

Fed Hike Bets Overshadow China US Auto Tariff Cut, AUD/USD at Risk

** All times listed in GMT. See the full economic calendar here

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--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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