Make no Mistake-it’s a Currency War

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


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