China’s Trade Retaliation Has USD/CNH Bulls Eyeing Decade-Plus Highs Near 7.00
May 13, 2019 11:36 AM
While nothing is official yet, China’s actions and media reports over the weekend suggest that the doomsday scenario is growing increasingly likely, with negative repercussions for investors’ risk appetite.
Last week, we outlined three trade deal scenarios and their potential impact on the S&P 500, noting that one scenario involved China retaliating to US tariffs “through a combination of its own tariffs, currency devaluation, policy stimulus, and greater restrictions on US companies. A true ‘trade war’ between the planets two largest economies could drive the global economy into recession…” While nothing is official yet, China’s actions and media reports over the weekend suggest that the doomsday scenario is growing increasingly likely, with negative repercussions for investors’ risk appetite.
This morning, Beijing stated that it would raise tariffs on $60B of US imports to as high as 25% on 1 June. While the Dealmaker-in-Chief will no doubt view this response as weak (especially given the US’s threat to raise tariffs on an additional $325B of Chinese goods), it’s worth noting that China has other levers to pull.
For example, USD/CNH has surged over the last six days, bringing the yuan to near its lowest level against the dollar in a decade. A weaker yuan could help cushion the impact of new US tariffs by making Chinese goods cheaper to overseas consumers. Perhaps most worryingly, state-run media has suggested China may stop purchasing US agricultural products and energy entirely and that Chinese scholars were exploring options to “dump” US treasury holdings.
Source: TradingView, FOREX.com
As my colleague Fawad Razaqzada noted earlier today, the first variable to watch for signs of a shift is the tone of policymakers’ comments. It’s been a mere eight days since we went from both sides describing talks as “constructive” and a deal as “close,” to Trump threatening that China will be “hurt very badly” if it doesn’t do a deal and China declaring that it will “never surrender to external pressure.”
For now, USD/CNH looks like it may have a date with 7.00, and as long as trade rhetoric remains incendiary, traders will want to strap in more volatility out of USD/CNH and global markets broadly.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.