By Peter Rosenstreich

So President Trump was bluffing: as we expected, the threat of a US-China trade war has deescalated. This is becoming a clear pattern of negotiation. Trump talks tough, and then backs down behind the scenes. Politically, this is brilliant – he can take his (ultimately) insignificant tariffs into November’s midterm elections as ‘proof’ that he has delivered on his 2016 campaign promises. This is a powerful message to his supporters that Trump will do what other politicians won’t do, i.e. stare down and stand up to China. In our view, the likelihood that Democrats this year will recapture the House or the Senate just got a lot less likely.

As geopolitical tensions eased, the LIBOR-OIS spread narrowed, US treasuries shifted into defensive trading and the USD was sold across the board. The greenback was especially weak against the commodity bloc, as China’s new RMB-dominated oil-futures-contract (a direct competitor to WTI and Brent) proved a massive success. With coming US-interest-rate hikes already priced in and additional hikes requiring significant acceleration in US growth, the USD upside look limited.

Emerging markets currencies are improving on the lowering of trade risk, and the Euro could hardly look stronger. Core Euro area inflation should hold in March, pushing the European Central Bank closer to ending its dovish policy.

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