Chinese yuan breach of long-defended landmark 7 to the greenback is finally over, a trend that genuinely confirms Chinese authorities’ willingness to support economic growth and financial stability in a context of worsening trade with the United States. In a reply to Trump’s announcement of 10% tariffs on $300 billion Chinese imported goods, China is also expected to interrupt US agriculture imports, putting additional volatility on financial markets as the outlook for corporate earnings and the world economy is worsening. Further monetary easing is therefore to be expected while the Fed is likely to turn more dovish despite last week comments.
The decline in Chinese yuan has been surprising financial markets in a context of rising trade discords as the Japan – South Korea conflict is expected to escalate. USD/CNY and EUR/CNY have risen +1.50% and +1.90% respectively on Monday while both implied volatility indices VIX and and VStoxx soared at January 2019 high as market selloff is maintained. The reaction of investors is still largely justified since the recent weakness of the yuan raises questions about the quality of 3Q:2019 earnings season, after Asian companies’ results already confirmed a decline in 2Q. Unless global economic conditions improve, a weaker yuan should negatively affect Asian exports and investments. On the same line, South Korean President Moon Jae-in is expected to announce retaliatory measures against Japan after the latter announced export restrictions on three essential components for chip production, with the two countries withdrawing from each other’s export white lists. Under current circumstances, risk-off sentiment should stay high this week.
Currently trading at 7.0442, USD/CNY rise is expected to sustain.
