Asia open: China's one trillion export problem, sends FX traders on Yuan watch

Markets

Most U.S. stocks are pushing higher on Monday, with sectors expected to benefit from Trump’s re-election—particularly small-caps and financials—leading the way. While Big Tech has been cooling off and keeping the indexes from soaring, the S&P 500 still managed to edge upward in late trading. This comes off the back of its best week of the year, driven by Trump’s election victory and a rate cut from the Fed aimed at propping up economic growth.

Indeed, the real story is in small-cap stocks and financials, which have been turbocharged by post-election optimism. Small businesses love the pro-growth vibes, while financials, buoyed by the prospect of lighter regulation, are in full swing. These sectors are driving the market forward, even as Big Tech takes a pause. It’s a classic “broadening out”, where previously sidelined sectors are finally taking the spotlight.

The Russell 2000 small cap index rose about 1.5% to within 1% of the record high from November 2021. 

The Trump Trade is alive and kicking in other corners of the market, with crypto leading the charge as Bitcoin shatters records, soaring past $86,000 for the first time! Trump’s crypto-friendly stance and his bold promise to make the U.S. the “crypto capital of the world” have injected fresh fuel into the digital currency frenzy.

Meanwhile, the dollar is flexing its muscle, though we’re just in the early stages of what could be a roaring trade-war-fueled dollar rally. Buckle up—the greenback’s rise may have only just begun!

Trump and his transition crew are set to grab all the headlines this week but don’t sleep on the heavyweight macro data rolling in. The U.S. inflation report is dropping soon and might steal the spotlight—at least for a fleeting moment. We could see some shake-ups in policy talk and market moves with inflation numbers in the mix. So, while Trump’s D.C. return is the main event, keep one eye on the numbers—they could still pack a punch, espeically on a top-side beat.

Forex markets

The dollar keeps riding last week's post-election momentum, fueled by buzz around potential Trump tariffs that could shake up export-heavy economies and anticipated U.S. tax cuts that could supercharge American growth. It's a solid setup for the greenback, especially as China’s deflation woes deepen, highlighted by recent weak inflation numbers. Add in Germany’s simmering political tensions—with a potential no-confidence vote in December that could trigger snap elections by February—and we’ve got a perfect storm keeping the dollar strong.

Even with the U.S. bond market closed on Monday for Veterans Day, the dollar’s rally marched on. This recent upswing was first sparked by rumours late Friday that Trump might reinstate his "Tariff Titan," Robert Lighthizer, as trade czar. Although Reuters tried to dampen the excitement with insider reports to the contrary, FX traders are staying sharp—where there’s smoke, they sense fire. If a hardline, America First trade czar is indeed re-entering the arena, brace for Trump 2.0 to launch an aggressive trade offensive, potentially stirring up some serious turbulence in FX markets.

The real question circulating among FX players: when will Trump’s trade agenda charge out of the gate? Wall Street is tentatively banking on a late 2025 or early 2026 timeline, allowing his team time to attempt diplomacy before reaching for the tariff stick. But word on the street hints that Trump could fast-track his tariff push, possibly leaning on current trade data from China to justify earlier action. And with China’s trade surplus on track to hit record highs this year, that showdown may not be too far off.

If the current trend holds, the Chinese trade surplus could be near a whopping $1 trillion, setting the stage for a potential face-off with major economies and provoking Tarrif Man Trump into action. Already this year, China’s goods trade surplus soared to an unprecedented $785 billion in the first 10 months—up 16% from last year—as exporters ramped up efforts, perhaps in anticipation of the Trump trade shakeup. Meanwhile, China’s domestic consumption engine sputters in deflationary territory, pushing Beijing to rely more heavily on cheap exports to keep the economy afloat.

So yes, if Trump’s 60-100% tariffs come into play, they’d hit China’s economy with the force of a 10-ton anvil dropping from the Shanghai Tower, sending waves through global trade and likely crushing Asia FX. This would then send bullish dollar waves around the globe in tsunami fashion.

Usually, record exports would be a badge of success for China, but with Trump back on the scene and the EU just as unhappy, they’re shaping up to be the elephant in the room.

Exchange rates boil down to two key fundamentals: interest rate spreads and risk premiums. Interest rate differentials guide financial institutions’ asset choices and corporate hedging strategies, while the risk premium is all about the price of uncertainty—how far the unknown can push exchange rates away from fair value. With Trump’s return to Washington, expect that risk premium to shoot up. Even without running my exact calculations (actual exchange-rate change minus the maturity-adjusted interest rate differential), the market braces for heightened volatility as Trump-era unpredictability re-enters the scene. So, the risk premium is espeically key in today’s markets.

Yuan watch

Traders will be vigilant and closely monitor China’s daily yuan fix from here to the end of 2026 and probably beyond for two key indicators. First, there’s a keen focus on whether China will hold the line against depreciation pressures, especially with potential Trump-era tariffs looming on the horizon. The market is watching to see if Beijing will resist letting the yuan slide in anticipation of this tariff impact. Second, all eyes are on whether China might use the daily fix to anchor the spot rate, as it has done in the past, sending a clear message of stability to the markets. These moves could signal Beijing’s commitment to managing the yuan’s trajectory amid growing external pressures.

In September 2022, the People's Bank of China (PBOC) set the yuan's reference rate at 6.9116 per dollar, a 598 pips stronger than market expectations. This decisive action marked the strongest bias on record, signalling Beijing's readiness to support its currency against external pressures.

Currently, the U.S. dollar is exhibiting broad strength. However, should the yuan experience unique weakening trends, traders will likely turn vigilant and closely monitor any potential intervention smoke signals from the PBOC to stabilize the currency.

For the markets, China’s fix strategy is more than just a number—it’s a barometer of how far China is willing to go to defend its currency amid growing global economic tension.

Oil markets

Crude oil prices extended last week’s losses, with a surging U.S. dollar dampening trader enthusiasm for oil on a correlation basis. Adding to the bearish mood were fresh concerns about demand from China, where weekend data showed lacklustre consumer inflation in October and another drop in factory gate prices. This shift in sentiment is quite a contrast from the days leading up to the U.S. election when optimism spiked as OPEC delayed a planned production hike amid rising tensions in the Middle East.

With OPEC and critical oil think tanks set to release updated reports, any downgrades in demand—especially from OPEC—could send Brent oil prices tumbling toward the $70 mark.

As for the Trump trade, the question looms: can Trump nudge Big Oil, known for its disciplined low-capex, high-cash-flow stance, to ramp up production? Markets are betting that Trump’s sway with the oil sector could encourage U.S. producers to throw him a bone in 2025, potentially driving U.S. output to fresh records under his administration.

With demand softening in China and non-OPEC producers maintaining steady output alongside OPEC’s substantial spare capacity, the outlook for oil prices remains weak in the years ahead.