China’s counterpunching?

Marius Paun | London, UK | Senior dealer | Friday, 09th August 2019

Gold prices continue to rally, moving above the psychological $ 1500.00 mark, as Sino-US disputes make the central bankers around the world rather edgy. A case in point, the New Zealand Central Bank cut its benchmark interest rate by 50 basis points from 1.5% to 1% versus expectations of only 25 basis points cut. The Reserve Bank of India and the Bank of Thailand followed suit. The precious metal reached $1510.00 although has since had a minor pullback on Friday morning, back below the $1500.00 mark.

China’s own currency, the onshore yuan fell to an 11year low, now costing more than 7 to buy one US dollar which indicates that the Chinese may not rush to support it any time soon, or at the least support it less than they have recently. The Trump administration was quick to label China ‘a currency manipulator’, leading to People’s Bank of China Governor Yi Gang saying his country ‘will not engage in competitive devaluation’ CNBC reports.

On the other hand, some analysts expressed views that allowing yuan’s freefall, Chinese government has in fact weaponized its currency as the trade war intensifies.

The US stock markets started the week on the back foot as Monday saw a selloff of more than 3% for each of Dow Jones, S&P and Nasdaq. Although a rally back was observed on Wednesday, it seems the US stocks are ending the week under renewed downward pressure.

Back in the UK the second quarter preliminary GDP figures showed a drop of 0.2% versus expectations for a flat result. In reaction to this first quarterly contraction since Q4 2012, the pound sterling fell below 1.21 vs the US Dollar. It seems that every central banker in the developed world is trying to devalue their respective currencies by slashing rates and/or other easing measures. But the Bank of England benefits from that, mainly on the Brexit saga and a slump in the GDP without much effort on their part elsewhere? Not bad.

ECB published the economic bulletin after its July policy meeting expressing concerns that the current climate of “prolonged uncertainty” is “dampening economic sentiment”. The manufacturing sector is one to keep an eye on. Market participants seem to anticipate weaker growth in the coming quarters, therefore leading to a potential restart of Quantitative Easing. Nonetheless, the EURUSD moved higher during the week hovering around 1.12 currently.

So, if the widespread consensus a few months back was that a deal between China and the US could be struck by the end of 2019, now that favourable outcome appears to be becoming increasingly doubtful.