A lot has happened since my article last Thursday. I have actually been away from the office
since Friday until late last night. So, did I expect the Chinese central bank to light the blue
touch paper by letting their currency fall through 7 to the dollar?
The honest answer is yes I did, but certainly not this soon. Of course we all know now how dramatic the impact of this has been. Global equity markets went into a tailspin on Monday, but in truth they were already coming off beforehand anyway. The PBOC move merely accentuated and sharpened the sell-off. Let me just now share with you a 5year chart of the offshore USDCNH.
As you can see I have drawn a red parallel line on this chart. The breakout above 7.00 is
technically explosive and could easily lead to a more pronounced upside move towards
8.00.
So, given all that has unfolded in only a few days, its clear to see that we are now in the
throws of a global currency war. The prospect of this is something I have mentioned many
times before and again in my reports only last week, but as I just said; I certainly didn’t
expect it to unfold this quickly. Hence, the Chinese move was clearly an opening salvo in
that regard and obviously a direct response to Trump’s latest trade tariff threats. Naturally,
all of this has had a dramatic impact on the global equity markets with those heavy falls
posted on Monday.
Perhaps unsurprising therefore that the Reserve Bank of New Zealand decided to cut their
benchmark rate by more that expected at 3am this morning. The RBNZ lowered their official
rate from 1.5% to 1.0%. This has sent the NZD sharply lower overnight which of course it
was clearly designed to do, in what was an obvious attempt to counter the move in the
Chinese currency. To a lesser degree the move by the RBNZ was also aimed at matching the
RBA’s current 1% benchmark rate. However, unless anything changes and given the
circumstances, I’d be surprised if the RBA takes this lying down when they meet again next
month (on 03/09) to decide on monetary policy.
The upshot of all of this is that central banks around the world are now hitting the panic
button and that’s not good news for equity markets because far from lower rates being
supportive for those markets in the short term; its only likely to set more alarm bells ringing
and that’s driving more flow into the safety of government bonds and JPY and gold. Gold
has just posted a fresh 6year high above $1490 earlier this morning. Furthermore, gold
priced in GBP has soared past £1200 an ounce too. By the way, I still like this one folks! Bond
yields are yet to recover the heavy falls they posted on Monday with the UST 10year yield
still around 1.68% this morning.
Meantime, whilst the dollar has gained versus the commodity currencies (the NZD, AUD and
CAD), it has of course suffered some heavy losses versus the JPY at the same time as giving
back its most recent gains versus the EUR. These are all classic risk aversion trades with the
likes of the AUDJPY, CADJPY and NZDJPY all getting hammered over the past couple of days.
However, the GBPJPY and the EURJPY have not escaped either, with both getting hit hard on Monday too. Indeed, the one that I previously said concerns me the most; the GBPJPY which dropped to as low as 128.15 on Monday and since breaking down through 130, has yet to recover back above that level.
The USDJPY traded to its lowest point since January 3 rd on Monday too when it touched
105.52 and whilst just about clinging to the bottom end of its 105-112 2019 range, the
downside looks extremely susceptible to further bad news.
The upshot of this is that it all depends on who makes the next move now. The talk on the
street that the US, only a few weeks back, considered the option of trying to devalue the
dollar by 10% clearly hasn’t been lost on the Chinese and probably explains why they made
the decision to strike first last weekend. To be honest though in a currency war, often there
are no ultimate winners and the more likely upshot is that it will only succeed in sparking a
global recession.
Consequently, we live in dangerous times now and until the threat passes we are going to
see more volatility and more money forced into safe havens- gold, bonds and JPY being the
lead protagonists in that respect.
Beyond all this and more immediately, we do have the potential to see how those concerns
might accelerate with some of the data releases due before the week is out-most especially
in the latest Japanese and UK Q2 GDP revisions-both expected to be very weak. So far the
relapse in the dollar this week has surely saved the GBPUSD from falling through 1.20, but at
the same time the GBPEUR has been less fortunate with that trading to as low as 1.0810.
So, with the UK still in crisis and the world in the midst of a global currency war, its
understandable that markets are extremely nervous now. I am reminded of the old (and
seemingly rather hollow) G20 pledge- “To refrain from competitive devaluation”. Looks like
a lot of luck will be required now to see that stick!
Important Economic Releases Due This week
08/08- 2.30am China July Trade balance
09/08- 12.50am Japan Q2 GDP Revision
09/08- 1.30am China July New Business Loans
09/08- 2.30am China July CPI Inflation Report
09/08- 9.30am UK Q2 GDP Revision
09/08- 1.30pm Canada July Unemployment Report