Latest Trade War Developments

Between Trump tweets and Chinese whispers via state-controlled media, it can be difficult to pinpoint precisely where things stand in the ongoing battle between the world’s two economic superpowers. Saxo's Christopher Dembik says the CNYUSD rate is the best proxy we have. Here’s why.

Submitted by Christopher Dembik of SaxoBank

As Saxo Head of FX Strategy John Hardy and I both mentioned, we need to look closely at the Chnese yuan this week. In my view, the yuan fixing is the right proxy to understand how the US-China trade negotiations are going. And it isn’t pretty! Since the end of last week, the yuan/dollar fixing has been cut by 45pips to 6.8365. As negotiations are probably going nowhere in the coming days, we could see the fixing moving closer to 6.90. However, I don’t think that the psychological threshold of 7.00 could be reached as it would have deep negative consequences on local firms that use their CNY profits to repay their USD debt. A large devaluation is still a risk but is not the central scenario for the Chinese authorities.

Softer tone in the US vs tougher tone in China

Yesterday evening, senior Trump administration officials tried to appease tensions. US secretary of the Treasury Mnuchin confirmed, without giving much detail, that the US-China trade talks are still ongoing. The tone is clearly different in China where the official media, such as CCTV and People’s Daily, adopted a tougher stance. It is interesting to note that in the previous rounds of trade disputes that occurred since Autumn 2018, People’s Daily articles mostly used the term “trade friction” instead of “trade war” until now… As of yesterday, all the articles and TV reports mention “trade war”. This terminology change means a lot and confirms that the negotiations have entered a more dangerous phase. In addition, China has tightened its “national security” review for foreign investments, which can be considered as another step in the retaliation process.

This is not 2018 again in the FX market

Looking at the initial reaction of the market yesterday, it is likely that the USD will not benefit from the trade war, contrary to what happened in 2018, as investors expect its main US impact would be to damage the economy and increase the likelihood of Fed rate cut this year. Investors are betting that there is a 60%-70% probability that the December 12 Federal Open Market Committee will see a rate cut. Policymakers are starting to pay attention and it may influence forward guidance in the upcoming June meeting by increasing the focus on the market reaction to the trade war and macroeconomic effect of higher tariffs (leading both to higher inflation and less growth which wwould pose a serious policy dilemma to the Fed).

Trump’s approval rate is still high

On the US domestic front, President Trump is now seeking $15 billion to bail out farmers in order to mitigate the negative impact of the trade war. Interestingly, more and more Republican Congressmen that were interviewed yesterday on US TV were very vocal against the latest measures decided by the Trump administration. It is, however, unlikely to have any influence on the ongoing process or to push the administration to comprise with Beijing. Trump is looking at polls and the message they send is bright and clear: as of yesterday, 42% of US voters supported Trump’s policy (FiveThirtyEight). His electoral base has remained stable, faithful and very broad since he was elected.

What’s next?

By May 18 – Potential US tariffs on global auto sector.

June 1 – China’s move to raise the rate of additional tariffs to 25% on 2,493 US products (representing $60 billion worth of US imports) will come into effect. In addition, list 3 tariffs from 10% to 25% decided by the USA against China will truly be implemented for all products. For the moment, an exemption applies to list 3 products exported before May 10 and arriving in the US before June 1. For these products, the duty rate is still at 10%.

June 17 – The USTR will hold a public hearing on potential duty of up to 25% tariffs on virtually all Chinese goods (list 4 tariffs) that are not currently covered by previous tariffs hikes. It will be followed by at least a week of discussions.

June 28 – Likely meeting between presidents Trump and Xi at the G20 meeting in Osaka to reach a compromise on trade issues.

FULL ARTICLE SOURCE

https://www.zerohedge.com/news/2019-05-15/latest-trade-war-developments

ANONS always follow the Gold.

Central Banks Are Buying Gold At The Fastest Pace In Six Years

Earlier this month the World Gold Council published its quarterly report– and it shows that central banks and foreign governments from around the world are buying up gold at their fastest pace in six years.

This is pretty big news, and it says a LOT about the future of the dollar.

Remember, central banks and foreign governments hold literally TRILLIONS of dollars of reserves… and traditionally they do this by buying US government debt.

It sounds strange, but to big institutions, banks, etc., US government debt is equivalent to cash. They use it as a form of money.

More importantly, they hold US dollars because that’s the global standard: the US dollar has been the world’s primary international reserve currency for seventy five years.

So US debt is extremely liquid. In fact, the $22 trillion US debt market is the biggest and most liquid market in the world.

But foreign governments have started breaking with the tradition of buying treasuries.

As the World Gold Council’s report showed us, foreign governments and central banks have been buying a LOT more gold than in previous years.

Net gold purchases in Q1/2019 among foreign governments and central banks was nearly 70% greater than Q1/2018… and the highest rate of first quarter purchases in six years.

The Chinese in particular, have been stockpiling gold faster than ever, while at the same time, Chinese ownership of US treasuries as a percentage of total holdings has been gradually declining over the past years.

And it’s not just China.

Russia, Turkey, Qatar, and even Colombia – a long-time ally of the US – have been diversifying and buying a lot more gold.

There are a few obvious reasons behind that.

The debt of the US federal government recently reached $22 trillion. And it isn’t getting any better– they add at least $1 trillion to the debt each year.

FULL ARTICLE SOURCE

https://www.zerohedge.com/news/2019-05-15/central-banks-are-buying-gold-fastest-pace-six-years