It’s a sea of green for Asian equities and currencies on Wednesday, after US President Donald Trump said that he will hold “extended talks” with Chinese President Xi Jinping at the G20 summit on June 28-29. The Chinese Offshore Yuan was one of the biggest beneficiaries from this development, having gained about 0.6 percent since Trump’s tweet to return below the psychological 6.90 level against the US Dollar. The South Korean Won climbed 0.7 percent, while the Singapore Dollar and Malaysian Ringgit strengthened by 0.2 percent versus the Greenback, as the currencies of trade-dependent economies enjoy the rise in optimism.

Markets have been desperate for some glimmer of hope on the trade front, and Trump’s latest tweet once again underscores the fluidity surrounding US-China relations while proving that market sentiment can still turn on a dime. Optimism over the resumption in US-China trade talks has given risk appetite a shot in the arm, and is expected to support market sentiment leading up to the eagerly-anticipated Trump-Xi meeting in Japan next week.

Cautious optimism is warranted, given fluidity surrounding US-China trade developments

With investors reenergized by Trump’s comments, markets will hope that a US-China deal is  still on the table. A significant resolution to the US-China standoff could potentially help global economic growth regain some momentum while boosting investor sentiment further.

Markets however must be mindful that sentiment does not overtake the reality of trade negotiations, as “extended talks” does not necessarily translate into the removal of US-China trade tariffs that have weighed on global growth. There remain fundamental differences between the world’s two largest economies. It remains to be seen whether this impasse can be resolved in a meaningful and lasting way. Should markets get ahead of themselves and overamplify the prospects of a US-China trade deal, an outcome that fails to meet elevated expectations could unravel recent gains in Asian assets.

Trade optimism threatens to undermine Dollar’s resilience and ease Fed away from dovish stance

The flare up in risk appetite puts the Greenback’s recent gains on shaky ground, as the Dollar index (DXY) currently steadies above the 97.6 mark at the time of writing, leading up to the Federal Reserve’s policy announcement. While the Federal Reserve is not expected to lower interest rates this week, despite the mixed US economic indicators so far in Q2 and the ongoing US-China trade conflict, Fed chair Jerome Powell’s policy statement and economic outlook could still have an outsized impact on the markets.

Dollar bears may have the wind knocked out of their sails should the Fed adopt a tone that’s less-dovish-than-expected, even as market clamour for a US interest rate cut still rings loud and clear. A US-China trade deal that ultimately lifts tit-for-tat tariffs could also prompt the Fed to back away from its projected easing bias, which in turn may discourage Dollar bears.

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