US-China relations hit the wires

An overnight phone call between the US president Joe Biden and China’s leader Xi Jinping occupied the media on Friday. Not because of the market reaction it caused since that was negligible, but because of the potential positive implications the dialogue could have on the broken US-China trade relations in the future.

Although both presidents are focused on managing pandemic headwinds at home, the US trade deficit with China has worsened to fresh highs since the last conversation in February. Moreover, there are still numerous battles open between the nations, everything from business regulations to South China Sea ruling, Taiwan, and human rights in Hong Kong and Xinjiang, which still need a careful handling despite China attempting to make things right on the regulatory front.

According to officials, this year’s behind-closed doors dialogues between diplomats led to more criticism and controversial outcomes, and perhaps this was a serious reason for the leaders to arrange a personal discussion, but markets took it as an encouraging sign of cooperation instead, adding some support under the risk-sensitive kiwi and aussie, while cutting some momentum from the safe-haven US dollar.

Dollar driven by Fed; US stocks eye a negative weekly close

Nevertheless, what matters most for the greenback nowadays is whether the Fed will unveil its bond tapering plans in November or December since Powell’s Jackson Hole speech and comments from key policymakers have almost excluded the case for a September announcement. Cleveland Fed President Loretta Mester admitted that inflation will remain elevated this year and slow its pace in the following one. San Francisco Fed president Mary Daly is also scheduled to speak later today before the two-week blackout period starts ahead of the FOMC policy meeting.

With bond tapering approaching on the horizon and high valuation jitters coming back under the spotlight, Wall Street could come under pressure. Yet, policies are overall expected to remain accommodative towards consumers and businesses as long as the pandemic continues to tease growth prospects. Hence, buying the dip is still a good idea in stock markets.

In the meantime, Wall Street opened with moderate gains, and it would be interesting to see if buying forces can strengthen enough to escape a negative weekly close. The pan-European STOXX 600 could not join the dynamic rally in Asia, trading neutral so far in the day, with consumer cyclicals balancing losses in utilities and real estate.

Canadian employment data mixed

As regards data releases, Canadian employment data showed similar results to the US NFP report, but the miss in jobs growth was less disappointing. Employment expanded at a softer pace of 90.2k compared to 100k expected, but was enough to press the unemployment rate to 7.1% versus 7.3% forecasted. Dollar/loonie resumed its negative momentum in the aftermath, printing a new intra-day low of 1.2584. Lonnie/yen bounced a few pips higher to 87.27.

Pound in bullish mode

Turning to European currencies, the pound is heading for a third weekly gain against the US dollar at 1.3847, attempting to beat September’s high too, despite the miss in July GDP growth figures today. Pound/yen is also in bullish mode, marking a fresh one-month high at 152.62 and above the key resistance territory of 152,25.

Polls suggest that the BoE may hike interest rates by the end of 2022 or even earlier if inflation keeps heating and economic recovery picks up steam, though next week’s UK data should add more credence to this narrative for the pound to extend this week’s rally. Perhaps some additional hawkish comments from BoE policymakers could be more helpful.

Euro/dollar is battling the 1.1850 barrier for the third consecutive day.