Despite not reaching an agreement yet, the talks of US-China trade in Beijing last week fostered market hopes for the prospect of the forex trading war ending. The US Dollar moved lower in early Asian trade on Monday (18/2), following positive results from the 5-day US-China trade talks in Beijing last week. This has prompted investors to switch from safe-haven assets to riskier assets. 

This decline has been significant as Greenback earlier in this week was reflected in the movement of the Dollar Index (DXY) which recorded open prices in the range of 96.80. The opening level is much lower than around 97.36 at the closing session last weekend, making prices create a quite wide gap in the H1 time frame.The US Dollar has weakened against major currencies such as Euro, Sterling, AUD and Canadian Dollars, including the Swiss Franc. However, the US Dollar strengthened against the yen, especially as the release of Japanese economic data this morning was below expectations.

US-China Talk Progress Awakens Risk Appetite

Both the United States and China reported positive progress in the 5-day trade talks in Beijing last week. Nevertheless, the White House said there was still a lot of work to be done to force changes in China's trade behavior, which Trump considered to be detrimental to the US for a long time.

Although it hasn't really reached an agreement yet, the market responded positively to news of progress related to the US-China trade talks, especially after news spread that the two countries would continue negotiations next week in Washington. This opens up positive possibilities before the March 1 limit that the President Trump wants. Michael McCarthy. the Chief Market Strategist at CMC Markets said that the US-China trade talks are the main focus of today's market players, with the talks shifting from Beijing to Washington. He said that investors are hoping to get positive news regarding the progress of the two countries' talks.

Chinese Producer Inflation Records The Weakest Rate Since 2016

Weakening domestic demand has a direct impact on Chinese inflation at the producer level, which shows the most sluggish growth in the last three years. China's Statistics Department on Friday (15/2) released Producer Inflation data which only grew 0.1% YoY in January 2019. This also marked a seven month slowdown in a row, and became the weakest pace of growth since September 2016.

China's Producer Inflation Rate, which is only 0.1 percent above, is worse than economists forecast that predicts growth at 0.3 percent YoY. On a monthly basis (MoM), the PPI fell to the level of 0.6 percent, worse than the previous period's figure of 1.0 percent, and marked the third decline in the last 3 months.

The slowdown also occurred in China's Consumer Inflation (CPI) which grew 1.7% YoY in January, or slightly down from the previous period's release of 1.9%. The results were disappointing for market projections that expect the CPI to remain unchanged from the previous level of 1.9 percent. Economists argue that softening prices at the Chinese consumer level is caused by weak domestic demand in recent months.

Weak Inflation Opens the Way to Monetary Easing

China's disappointing inflation release paved the way for Chinese authorities to carry out monetary easing to support the economy. With annual PPI growth of only 0.1 percent, the market sees the possibility of deflation in the world's second largest economy increasing. Further risk of deflation will damage the company's profitability and will have a negative impact on the economy.

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