Time to grab the tin helmets ..... This is what "escalation" looks like ....
ref :- "These Charts Show Global Markets Roiles as Yuan Breaches 7 Level" , Bloomberg Markets
Whoops .... the problem with President Trump's manner of doing things from a market trading point of view is that very often the actions taken are directly contradictory to those that the White House rhetoric might suggest were more likely. Of course, part of that is intentional in that actions are all the more effective for being unexpected, and besides the administration would argue that they have to react to situations as they develop.
So it was last week, when the rhetoric leading up to the trade talks with China was largely positive only for Mr Trump to surprise (stun ?) the market on Thursday by slapping a 10% import tariff on $300 bn of previously untargeted Chinese goods, citing a total lack of movement in China's negotiating position.
The markets did not take it well, with the spectre of trade war escalation and it's likely effects on the global economy causing sell-offs in equity markets and safe-haven searching seeing money flowing into all the usual suspects (see below). If anyone had hoped for a calmer response after a weekend's contemplation they will have been sorely disappointed, and this morning there's another hugely signicant factor to consider, namely the upward breach of US Dollar versus Chinese Yuan/Renmimbi (USD/CNY) through 7.00.
The authorities in Beijing have been playing down the significance of USD / CNY 7.00 for some time, saying that 7.00 is "just a number". Not many believe that to be true, and actually not many more believe Beijing when they say such things but it does mean that the authorities there have given themselves an excuse not to defend that level. Which is probably just as well, since after China's central bank set it's daily reference rate above USD/CNY 6.90 for the first time since last year the market took the Yuan sailing through 7.00 and it currently trades at USD/CNY 7.04. The less restricted offshore rate (USD/CNH) has been as high as 7.11.
Now, this is BIG news ..... it opens up the possibility that China is "weaponizing" the Yuan, overseeing its devaluation to gain an unfair advantage for its exporters. Of course President Trump has been accusing China of doing this for ever , seemingly ignoring the logical reasons behind dollar strength and in spite of the evidence of his own US Treasury that so far has cleared China of the charge of currency manipulation.
But the very real danger is that the Yuan weakening up through USD/CNY 7.00 changes things. Even if Beijing cares, it's going to become more difficult to deny the accusations of manipulation. It's likely that it won't be enough to NOT intervene on foreign exchange markets to weaken the Yuan (one of the key criteria for the manipulation label), China's central back (PBOC) will probably have to intervene to support their currency. There's no immediate indication that for all their vast forex reserves they intend to do so. They'll have to keep an eye out against the danger of damaging capital outflows, but it's possible that they've decided that Mr Trump has taken the gloves off in this particular scrap and it's about time they did the same.
Right now (as we write), the President is probably preparing a twitter tirade against China and the developments on forex markets. We're used to such things by now of course, but there's a real fear that the US administration themselves are not far from direct action in the market to weaken the US dollar. That would be the final official nail in the coffin of the strong dollar policy that has prevailed in Washington for 20 years, but more importantly it would represent the trade war becoming a currency war too, and when you get to that stage it's mighty difficult to pull back from the conflict.
(Incidentally, just how would the US implement forex intervention ? Would operations be conducted by the US Treasury alone ? Or would the US Federal Reserve (who are at bitter odds with the President and whose board members probably wouldn't naturally support intervention) be compelled to participate ? Scope for more White House -v- Fed conflict, obviously ..... )
Anyway, the markets are extremely nervous .... as well they might be. It's a classic risk-off, safe haven day :
JAP YEN : the forex market's favourite bolthole when things turn nasty, is trading below 106 to USD -- was above 109.00 on Thursday
BONDS (Yields down mean prices up, of course) : US 10yr Treasury yielding as little as 1.744% at one point this morning (as high as 2.06% on Thursday), 10yr Germany and 10yr Japan at record lows of minus -.53% and minus -0.20 respectively
GOLD : Has traded above $1460 per oz. this morning, was $1420 at one point on Thursday
STOCKS : Asia and Europe under the cosh, S&P 500 futures trading down another 44 pts, (1.50%).
CRYPTOS : Not a very safe safe-haven in our view, but in spectacular favour today. Bitcoin trading $11,700 , up nearly 9%
Get the picture ? It's bloody out there .....
Probably shouldn't mention it but ..... because we're jaded old cynics, when President Trump announced the extra tariffs last week we momentarily .... just for half a second ..... wondered if it was possible that he was so angry at the Fed for only cutting rates by 1/4% on Wednesday that he was prepared to provoke enough concern about the trade war and the prospects for the global economy that he acted to make the Fed's rate cut look immediately and pitifully inadequate. After all, the President can reverse the application of tariffs in a second once the threat of them has achieved its purpose. Of course we immediately dismissed the notion .... NO president, not even this one, would take such a risk with the US and global economy in such a way. Not possible ..... no, definitely not. Can't think why such a crazy idea ever occurred to us .....