USD better as trade tensions ease
The King dollar made a remarkable return on Friday after the US and China have signalled their intention to sit at the negotiation table. The New Zealand dollar performed the worst among the G10 complex as it fell 0.60% to $0.6740. The drop of June Manufacturing PMI – down to 52.8 from 54.4 in May – could also explain the depreciation of the Kiwi.
Safe haven currencies resisted quite well to the sudden improvement in risk sentiment. The Swissie edged down only 0.10%, with USD/CHF testing the previous high of May 15th at 1.0042, while the Japanese yen gave up 0.20% as USD/JPY rose to 112.78.
The publication of June inflation report in the US only provided a limited boost on the greenback, as investors remain nervous about potential negative effects of a trade war on inflation. Indeed, the implementation of tariffs would be a double whammy as it could add upside pressure on inflation in the medium to long-term, while at the same time it will have a negative effect on growth, which would ultimately force the Fed hike rate less aggressively – if not put the tightening on pause for some time.
Are US tariffs effective?
As the USA and China continue to implement punitive duties, trade surplus records are occurring. China’s June surplus is estimated at USD 41.61 billion, its highest rate since the beginning of 2018, with exports slightly higher (+3.10%) and imports substantially lower (+6%; prior: +15.60%) than in May. The surplus with the US widened to USD 28.97 billion, its highest since 1999 periods. Chinese exports are mostly to Asia (about 46% in 2017), while the US accounts for 29% of total exports.
So, Chinese economic growth will not be primarily borne by exports but by domestic demand. Credit risk from households and non-financial firms remains large and the government recently implemented stricter regulations: these will drag private consumption and so Chinese growth. The People’s Bank of China is most probably planning to keep money loose for now, thus depreciating the yuan. USD/CNY trades at 6.6856 (year-to-date: +3%), its August 2017 level, and is headed to 6.70 in the short-term. Our year-end target for the pair is 6.80.
