The escalation of the US-China trade conflict supported defensive assets. The position of the Japanese currency, which paired with the dollar for the first time since March, fell below the key level of 110, looks the most beneficial (at the moment). And although the pair is sliding down quite slowly, the downward trend is evident: the price has lost 70 points since May 3. Given the rhetoric of Donald Trump, it is logical to assume that this dynamic will continue even further, especially since the White House has confirmed the increase in duties on Chinese goods worth $200 billion. However, some nuances indicate the riskiness of short positions on the USD/JPY pair. Indeed, according to a number of experts, Trump's external aggressiveness does not exclude the intention to conclude a trade deal with the PRC - but on more favorable terms.
It is worth recalling here that trade negotiations between Washington and Beijing have more than once been on the verge of collapse. For example, at the end of last year, Trump in a similar way threatened to introduce new duties, and this fact prompted the Chinese to make certain concessions, or rather, to take quite specific steps. China then pledged to increase imports of US agricultural products, energy and cars. In particular, Beijing agreed to increase the purchase of American agricultural products - primarily soybeans, corn and wheat, for a total amount of $ 30 billion. After that, the White House agreed to resolve trade issues in the next 90 days, during which the United States pledged to refrain from imposing additional duties on Chinese goods.
This three-month period expired on March 1, but the parties decided to extend the "moratorium" to continue the negotiations. In other words, even before concluding a deal, Trump was de facto able to "force" Beijing to change its trade policy, at least with respect to the above products. According to the latest data, in March, China increased the import of soybeans by 10%. In April, the Chinese increased imports of these products to 7.64 million tons, which is 10.7% more than the same month last year. These figures suggest that the Chinese are fulfilling their commitments - at least in this part.
As many analysts believe, today Trump is playing a similar game. According to the US president, negotiations are proceeding "too slowly" due to the fact that the Chinese side is trying to revise the conditions of the future deal. What exactly we are talking about is unknown, but previous rumors said that the US president agreed to "remove the brackets" of the dialogue a number of significant differences that hampered the entire negotiation process (in particular, we are talking about issues in the field of intellectual property protection).
According to a number of experts, Trump tries to resolve the remaining differences in his "extravagant" way. According to the American press, the parties have stalled on the question of how the agreement will be put into action. The White House plans to cancel duties gradually so as not to lose control of the situation. The Chinese, in turn, insist that this be done at one moment. It is likely that recent events will help the Chinese in making things "right", in terms of Trump's decision. In other words, the US president is playing a big show on the eve of the talks, which, despite numerous rumors, will take place.
And that is not all. According to US journalists, the White House has prepared a quite maneuverable scenario. The fact is that the new tariffs (even if they are introduced by tomorrow) will not apply to goods that are already in transit. This suggests that the parties will have a time gap (about three weeks) to still come to a common denominator. In other words, restrictive measures during this time will not work, but will serve as a "Damocles sword". Quite an interesting move in terms of "trade diplomacy".
Thus, the White House essentially does not intend to "burn bridges": Trump only makes a warning shot in the air, thereby denoting his intentions. In this aspect, it is important to understand that Chinese Vice Premier Liu He eventually did not cancel his visit to Washington (although it took place a day later). According to the Chinese press, Beijing was weighing in the pros and cons, studying Trump's true intentions in the light of recent statements. As a result, the negotiations today still started. This indicates that the bargain between China and the United States is too early to bury: the parties can still come to a big compromise, despite the pressure of the US president.
In light of the fact that the yen now depends only on the external fundamental background, the prospects for a "truce" (at least of a verbal nature) make short positions on the USD/JPY pair appear risky. Relatively speaking, if according to the results of the current negotiations, Trump "changes his wrath into mercy" in his tweets, the risk appetite in the market will increase again, and the demand for defensive assets, respectively, will decrease. In this case, the pair will return to a low of 110.35 (the lower limit of the Kumo cloud on the daily chart) with further growth prospects in the region of the 111th figure.
The material has been provided by InstaForex Company - www.instaforex.com