The pressure on the stock markets is growing. It is dangerous that at once the pressure comes from several regions, causing fears that the period of synchronous growth last year may be followed by a period of synchronous braking. Pockets of fears are located in the USA, Europe, and Asia.
In the U.S., the pressure on markets is due to a concern that the Fed takes too hawkish position while the latest data indicates a possible failure in a series of strong outcomes. It is not a reason to panic for the markets, and the sale of American stocks at this stage is very measured. Investors record the profits by selling the shares of High-tech companies that grew faster than the others in previous quarters. In addition, the shares of the construction sector companies, which have stalled in recent months, are declining. It is noteworthy that since last Thursday there has been a similar character of S&P500 dynamics: the stocks have been sold abundantly at the very beginning of the American session and have partially taken back the decline at the end of the Day. This is similar to the fixation of profits by large players. Although the decline is measured, S&P500 had lost 2% from October 3 peak levels by now. The USDJPY, serving as a demand indicator for risks, had lost 1.5% during the same time, having reversed down from the area of important resistance at 114.50.
In Europe, the populist Italian government remains in the spotlight on the backdrop of a skirmish with the bureaucrats from Brussels. EU officials require that the country better satisfied the Union’s standards, and the high officials of Italy call Brussels “enemies” in response. All this results in the weakening of the Italy markets and presses on the single currency. The index of the Milan stock Exchange has updated 16-month lows, and the yield of the 10-year bonds has jumped to the highest levels since January 2014. The EURUSD had sunk to 1.1460 (lows since August 20) but later bounced back to area 1.1500, where it is currently trading.
In China, the pressure on stock markets remains because of the fears around the trade wars consequences following the statements by U.S. representatives on “fundamental contradictions” in views with China. The pressure on the Chinese currency continues to increase, and the PBC allows the yuan to fall below the mark of 6.9 per dollar. The weakening of the currency will let the export-oriented companies gain a competitive advantage against the backdrop of tariffs from the U.S., but it can also increase the deflationary pressure worldwide in the medium term and suppress the demand for risks in the short-term.
Friday data on the labor market were surprisingly weak. The increase in the number of new jobs by 134K has been minimal for the last 12 months. Same as a year ago, the employment rate was affected by hurricanes, leading to reductions in Services.
At the same time, the unemployment rate has decreased to 3.7%, the minimum level since 1969, and companies in the manufacturing sector added 18K jobs, continuing to increase the employment. No surprise was the rate of increase in wages, showing an increase of 0.3% per month and 2.8% yoy, as a result, the dollar lost 0.4% in the initial response, but largely played losses in the recovery of the demand for safe assets.
We should note why the 49-year lows of the unemployment rate are less important than the inexpressive increase in Employment.
Firstly, within a week, there were positive signals from other indicators that tuned the market to an even stronger report than the expected 185K growth. ADP reported an increase in private sector employment by 230 thousand, ISM noted the growth of employment indices in their surveys, weekly initial claims also felt better than expected.
Secondly, the unemployment rate is a relative figure depending on the proportion of the active labor force. And it remains under pressure due to the aging population. The unemployment rate is, therefore, lower as people leave the workforce.
Thirdly, the number of employees looks like a stronger indicator of business activity for the markets, as it allows us to judge the growth of companies.
Weak employment growth rates have not exerted pressure on the market so much because of their weakness (we have seen much lower in previous years), but because of the hawk position of the Fed, voiced in previous days. The markets are waiting for strong increases in rates, and weak employment rates give rise the doubts whether the Fed’s plans have suppressed the economy too much.
As a result, S&P500 lost 0.6% on Friday, and at the opening of trades on Monday is reduced by another 0.55%. Chinese markets are impressively losing at the start of trades on Monday due to the return of worries around the hard landing of the Country’s economy. PBC reduced the reserve requirement rate to 100 bps, which is designed to support liquidity in the markets, but it did not save from the fall of the Shanghai Exchange Index by more than 4%. MSCI of the emerging markets updates 17-month lows.
Asian currency market suffers tough times. Trade war tensions that started in January 2018 are supposed to keep going. The US and China are two major players in the tariff game. While this game seems to be positive for the US dollar, the Chinese yuan is loosing.
The depreciation of the CNH is enormous. Since the beginning of 2018, USD/CNH has surged from levels near 6.26 to 6.90. Is it the endpoint? Unlikely. The leading world banks came to the conclusion that the CNH traders should expect more difficult months for the currency.
The main reason that made the banks decrease their forecasts on the CNH’s rate is the trade war’s impact. According to the economic data, in the first half of 2018 China suffered the first current account deficit in 20 years. China also got the first quarterly current account deficit in 17 years. As a result, experts predict a narrowing surplus or more frequent current account deficits in the future. It’s highly possible as the US is going to keep rolling out tariffs on Chinese goods.
On September 24, the US imposed $200 billion worth tariffs (additionally to $50 billion worth tariffs imposed earlier this year). The levied duty is 10%, however, it’s anticipated to increase to 25% at the beginning of 2019. Even though China may retaliate with additional tariffs, the situation will just worsen.
Another important reason is the gap between the US interest rate and Chinese interest rate. The Federal Reserve has already raised the interest rate three times this year and is anticipated to do it once again in December. At the same time, the People’s Bank of China is expected to keep the interest rate on hold. Leading financial institutions assume that China will sacrifice the price of the Chinese yuan to support the economy.
JPMorgan was one of the first banks who cut its forecast for the Chinese yuan. They think that the People’s Bank of China may hold a looser monetary policy that is anticipated to support the economy without an intervention in the yuan’s rate. As a result, the central bank may let the currency slide further. JPMorgan sees the USD/CNH at 7.01 by the end of December. The first half of 2019 will bring the pair to 7.19 (versus the previous forecast of 7.02).
Deutsche Bank AG considers the same reasons for the yuan’s decline. Bank’s experts see the worst scenario for the yuan in the next year. USD/CNH is expected to climb to 7.4.
Bank of America Merrill Lynch agreed with others and downgraded its forecast for the Chinese currency. The new forecast for the USD/CNH is 7.05 in the first quarter of 2019 (6.90 previously) and 7.10 (versus 6.85) in the second quarter. Moreover, talking about the current situation, the bank anticipates that the yuan will plunge by 2.5% by the next quarter.
However, not all experts are so pessimistic about the Chinese currency. According to the Bloomberg survey, there are analysts that predict the strengthening of the CNH and fall of the USD/CNH pair to 6.70 by the end of next year.
Who is more correct about the future of the CNH? Let’s have a look at the current situation.
On the weekly chart, we can see that the USD/CNH pair is trading at the highs of May 2017. The crucial resistance is at 6.9875 (the highest level since the beginning of 2017). In case the pair breaks above this level, there will be no doubts that it will surge further.
Making a conclusion, we can say that the yuan is under big pressure. Most of the experts predict the significant plunge of the Chinese currency. As the trade war is anticipated to escalate further, the Chinese economy and currency will suffer a lot. If only Mr. Trump changes its policy towards China, the CNH will be able to recover.
This article was written by Daria Bobrova, a senior analyst at FBS
Trump’s administration announced the introduction of 10%-tariffs for Chinese imports to $200 billion. The news had a moderately negative impact on the markets. The dynamics are limited, as the information about these measures appeared on Monday, which took from MSCI about 1% on Monday. We see something like the traditional reaction of the market “buy rumors, sell facts.”
At the same time, we cannot forget about the long-term negative consequences of the world trade problems. It is cautious to expect a response from China that threatened to abandon the planned negotiations with the United States in case of the trade war escalation.
In addition, trade disputes have already led to a decline in world trade, which last time happened in 2015 against the backdrop of the collapse of oil quotes, and before that was noticed only in 2008. The reduction is detrimental to the demand for raw materials and energy.
Metal quotes have been losing for the third session in a row. Brent oil lost 3.2%, once again stepping from the important resistance around $80 to the mark on $77.25. Under these circumstances, the current rollback of the markets should be seen as a temporary rollback after a sale earlier, but hardly as an excuse for a sustained growth.
The dollar has decreased this week by 0.6%, testing the minimum levels from the first half of July. It is obvious that the dollar is not able to develop the offensive, even though the Fed is moving in full swing to raise the rates in September and December. The weakening of the US currency is also a supporting factor for the markets of developing countries.
The current dollar deviation risks to increase if the dollar index overcomes the level of support at 93.80. No less important level for EURUSD is the mark of 1.17. If the euro succeeds steadily above these marks, the purchase of a single currency can noticeably increase on the investors’ faith in a further rally.
At the same time, the stock markets have not yet developed a certain dynamic: The index of S&P 500 remains below the important level of resistance (2900), although staying in the framework of the last -week growing mini-trend.
The Yuan has historically been a managed rather than floating currency, which has resulted in traders largely ignoring the USDCNY pair. However, China’s importance within the global economy and the current trade war may introduce a new period for the currency.
The Trump Era
When Trump was on the campaign trail, he repeatedly accused China of manipulating the Yuan to increase the competitiveness of exports. While this may have been the case in the past, at the time there was little evidence that China was devaluing its currency. In fact, at times it was more likely that the central bank was supporting the currency.
The Yuan initially weakened when Trump was elected, but then remained stable for the first months of his presidency. Between May 2017 and April 2017, the Dollar weakened against the Yuan, moving from a high 6.90 to as low as 6.24.
The Trade War
Trade tensions between China and the US began to escalate between January and May this year. In May, the US began to impose tariffs on certain Chinese imports. Or, to put it more accurately, they terminated tariff exemptions on certain products. More products were added in June, and it seems likely this will soon be extended to all Chinese imports.
China has responded by imposing tariffs of its own on US imports. However, Trump appears unlikely to back down regardless of the impact of a trade war. Going into the US midterm elections, Trump will want to appear strong, and will not want to be seen to be giving in to pressure from anyone.
Most of the response from the exchange rate has been a function of US Dollar strength, rather than Yuan weakness. However, in July and August, the Dollar has begun to appreciate more against the Yuan than against other currencies, indicating that the Yuan is under pressure.
There has been some speculation that China’s central bank has intervened to manipulate the currency; however, the evidence doesn’t support that view. In fact, the central bank has been more hands-off than usual, and it appears policymakers are relying more on fiscal stimulus to stimulate growth.
China’s policymakers are more concerned with protecting the domestic economy than with influencing the currency. GDP growth slowed to its lowest level since 2016 in the second quarter, and the People´s Bank of China (POBC) will be concerned with preventing further slowing of the economy.
Could the trade war evolve into a currency war? It’s unlikely that the Chinese government or central bank would want to intervene, although doing so to weaken the currency further could potentially offset the effects of tariffs. It has even been suggested that the POBC would rather intervene to protect the currency’s value to prevent capital flight, something that has happened in recent years.
However, the currency could weaken further if investors decide to divest from the Chinese stock market. A greater devaluation of the Yuan is, therefore, more likely to be driven by capital flows than by government action.
There are other external factors at play, too. The US Dollar is in general appreciating against most currencies, including the Euro and Yen. To complicate matters further,
Emerging markets, in general, are under pressure, and investors are selling emerging market assets, and currencies, across the board.
Analysts are divided – many believe the Yuan will soon stabilize, at least against the basket of currencies it is priced against. Some, however, believe there may be further weakness in store for the currency. Few are looking for the Yuan to strengthen to any great extent.
Trading the Yuan
The Yuan has historically not been a popular trading currency amongst Forex traders. There are several reasons for this. The Yuan is a managed currency, and the central bank has always tried to maintain a stable exchange rate. That means relatively little volatility (not great for trading) and uncertainty over what the central bank may do (not great for trading). Liquidity has generally been a problem for the pair.
However, this may be changing. Firstly, more Forex traders now have access to platforms allowing them to trade the Yuan. Secondly, we are seeing stronger trends in the USDCNH rate, and over the last two years, these trends have lasted longer than ever. In other words, the opportunity is becoming more attractive.
The Yuan has already become a more important currency within the global economy, and it’s inevitable that it will become even more important going forward. Some have suggested that in the wake of sanctions and new tariffs, countries like Russia and China may begin trading with one another in their own currencies. This could, in turn, see central banks holding a more diversified portfolio of currencies in their reserves, including the Yuan.
Those wanting to trade the Yuan can trade the Offshore Renminbi CFD through a limited number of Forex brokers, including Admiral Markets. The Offshore Renminbi (CNH) is a market for the Yuan/Renminbi that operates entirely outside of China. Historically the CNH fluctuated more than the Onshore Renminbi (CNY), but increasing liquidity is now reducing that volatility.
Trading the USD/CNH requires traders to pay attention to geopolitical developments, as recently these are the main catalysts for the pair’s movements.
As the second largest economy in the world, the absence of China’s currency from the active Forex markets has been an anomaly. However, it looks like we may see it join the list of major currency pairs in the coming years.
The immediate direction of the Yuan may be difficult to predict, but we can be reasonably certain there are volatility and opportunity ahead. It may be time for serious Forex traders to begin paying attention to it.
Forex and CFD trading carries a high risk and is not suitable for all investors. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks involved. Read more at www.admiralmarkets.com.