•China’s yuan and the Australian dollar regained some poise on Wednesday after upbeat comments from U.S. President Donald Trump suggested trade talks with Beijing could yet make headway.
The Chinese currency sank to a 2019 low of 6.92 on Monday in response to Washington and Beijing raising tariffs on the other’s goods.
But the yuan managed to break a six-day losing streak on Tuesday and rose 0.25% as broader sentiment stabilised after Trump said he expected Sino-U.S. trade negotiations to be successful.
China would be likely to intervene to stop any plunge through 7 against the dollar and could sell its vast holdings of Treasuries as a negotiation tactic against the United States.
“Trade wars do not benefit the dollar. If you look at the yen/dollar pair reacted to China announcing tariffs on U.S. goods it was clearly not positive for U.S. assets,” said Viraj Patel, a currency strategist at Arkera, a financial technology firm.
•The euro rose 0.15% to $1.1238.
Investor focus on Tuesday was also on euro zone industrial production for March and Germany’s ZEW economic sentiment index for May, both due around 0900 GMT.
•USD/JPY turns positive with S&P 500 futures, Kuroda reiterates easing bias
The bid tone around the Japanese Yen weakened in the last hour or so, allowing a bounce in the USD/JPY pair.
The spot is currently trading at 109.58, representing 0.25% gains on the day, having hit a low of 109.14 earlier today.
The recovery could be associated with the uptick in the S&P 500 futures, which seem to have picked up a bid in response to Trump's comments on China. The President reportedly said earlier today that he feels the negotiations with China will be successful.
The 0.5% bounce seen in the S&P 500 futures, however, could be short-lived. After all, the tit-for-tat trade war has resumed with China's retaliatory tariffs. Further, there is looming threat of Trump imposing tariffs on almost everything that US imports from China.
Should the index futures surrender gains, the USD/JPY will likely fall back to near 109.00 levels. Bank of Japan (BOJ) Kuroda was out on the wires a few minutes ago, reiterating the need to continue easing for a while. His comments, however, have largely been ignored by the markets, as there is widespread belief that the Japanese central bank has run out of ammo after having run an unnprecedented stimulus program since April 2013.
•Speaking at a White House event on Monday evening, U.S. President Donald Trump offered a projection about how much longer Washington and Beijing could be locked in heated trade negotiations.
“We’ll let you know in three or four weeks if it’s successful,” he said, according to NBC News.
•Consider it China’s nuclear option in the trade war with the U.S. — the ability to start dumping its massive pile of Treasury bonds that could trigger a surge in interest rates and substantially damage the American economy.
China currently owns $1.13 trillion in Treasurys, a fraction of the total $22 trillion in U.S. debt outstanding but 17.7% of the various securities held by foreign governments, according to data from the Treasury and the Securities Industry and Financial Markets Association. Should the Chinese decide to walk away or reduce their role in the market, that, at least in theory, could create a substantial dislocation for a country such as the U.S. that relies so much on sovereign entities to buy its paper.
At least for the moment, markets aren’t that worried that China could take such a seemingly drastic step, in large part because the move might not have much upside except to create headlines.
“It’s a self-destructive nuclear option,” said Robert Tipp, chief investment strategist and head of global bonds for PGIM Fixed Income. “Maybe it helps them as a bargaining chip, but it’s endangering the value of something they’re deeply involved in.”
In fact, the move actually could help the U.S.
For one, a Chinese reduction of Treasurys could weaken the dollar and make U.S. multinationals more competitive. For another, Treasury yields would rise and thus cause prices to fall, lowering the value of China’s portfolio.
“It still seems like Treasurys are the optimal place for security, flight to quality, capital appreciation etc. Moving around that sum of money seems very challenging now,” said Nick Maroutsos, co-head of global bonds for Janus Henderson. “It’s possible and could happen very gradually over a six- to 12-month period. But calling it and having it happen so quickly is very unlikely.”
•U.S. President Donald Trump said on Monday he would meet Chinese President Xi Jinping next month as the trade war between the world’s two largest economies intensified, sending shivers through global markets.
“Maybe something will happen,” Trump said in remarks at the White House. “We’re going to be meeting, as you know, at the G20 in Japan and that’ll be, I think, probably a very fruitful meeting.”
•Trump has said he is in no rush to finalize a deal with China. He again defended the move to hike U.S. tariffs and said there was no reason why American consumers would pay the costs.
Economists and industry consultants, however, maintain that it is U.S. businesses that will pay the costs and likely pass them on to consumers.
•U.S. President Donald Trump warned on Monday Iran would “suffer greatly” if it targeted U.S. interests after Washington deployed an aircraft carrier and more jet fighters at a time of rising tensions with Tehran.
•Oil was mixed on Tuesday as tensions in the Gulf appeared to stop short of a military showdown and both sides in the U.S.-China trade talks sounded conciliatory notes, signaling that a breakdown might be avoided.
Brent crude futures were at $70.40 a barrel at 0755 GMT, up 38 cents or 0.24 percent. Brent ended the previous session down 0.6 percent.
U.S. West Texas Intermediate (WTI) crude futures were at $60.92 per barrel, down 12 cents or 0.2 percent. WTI closed down 1 percent on Monday.
Reference: Reuters, CNBC, FX Street
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