All eyes on China still

As the US/China trade discussions continue this week certainsources suggested that integral to the success of these negotiations would be some agreement on ‘stabilizing’ the Chinese currency. So, perhaps it should come as little surprise that the CNY has subsequently strengthened against the dollar with the US currency falling back once again, to test a quite important support area that I previously outlined and targetedin my article on 11th January. To better see that please take a look at the chart below.

I peeled this chart off earlier this morning and you can see the USDCNY falling back to test that green parallel line at 6.6967- a point that defines a 38.2% retracement of the dollar’s move from below 6.25 to above 6.97.  As you can see the price tested this level previously and rebounded and itremains to be seen if will continue to hold that level on this second visit.

Now of course what the US really mean by ‘stabilizing’ the CNY is all about trying to thwart any Chinese attempt to manipulate their own currency lower again. Naturally, it would be to China’s advantage to seek to counter any potentially negative impacts of a trade deal by way of ‘competitive devaluation’- an accusation that has been levelled at them many times previously.  

It could be argued that the whole ‘Chinese arbitrage’ game of the past two decades has only been made possible because of the exchange rate. An exchange rate that has ensured that China has enjoyed a massive trade surplus, not just with the US, but around the globe too. However, I doubt that countries like Australia and Canada for example would agree with that argument because their economy’s have benefitted hugely from Chinese demand for commodities and raw products over the same period.

Therefore, when it comes to exchange rates; it is not alwaysjust a simple one dimensional argument. In any case when one looks deeper into the issue and you ask companies why they choose to have their products made over there they will tell you that it’s often more about efficiency and quality and not just about price.  However, personally, I don’t always buy that excuse.

So the question is; will the Chinese sign up to any trade agreement with the US that effectively removes the optionality of exchange rate adjustment. Perhaps one cannot rule that out, but quite honestly I very much doubt that they would. Maybe some some sort of ‘Band’ or ‘Peg’ might work as it still does with Hong Kong, but either way I don’t think it would be an agreement that China would want to enter into unless there was absolutely no alternative.

Meantime, the dollar elsewhere has continued to edge a little lower this week as the GBPUSD rebounds smartly and the EURUSD nudges back up, to around 1.1350 today. So the pound has outperformed the EUR in dollar terms which means the GBPEUR is back above 1.15 again and lifting to as high as 1.1540 earlier this morning. There does appear to be some GBP selling interest at that level for now, but if the price can get past that hurdle then we could soon be looking at 1.16 again.  Naturally, much will depend on what Brexit news breaks as to whether or not there’s further upside beyond there.

The stronger pound has helped to dent enthusiasm for the FTSE 100 which has drifted back towards 7150 today as the GBPUSD remains above 1.3050. Indeed, the upside for stocks globally seems to have stalled too and the S+P 500, which I touched on in Monday’s article, has also continued to shy off that 2800 level.

As to whether or not that continues will surely rest of what further emerges from those US/Chinese discussions. Perhapsand given the strong rally of recent weeks, that means any good news on that front is already priced in? Hard to gauge exactly, but surely the markets are now expecting a good outcome. What they clearly are not prepared for is the opposite!

Important Economic Releases Due this Week

22/02- 10am Eurozone Final January CPI Reading

22/02- 1.30pm Canadian December Retail Sales