· After the new tariffs were unveiled, China let the yuan break to its lowest level against the dollar in more than 10 years on Monday. China has historically managed its currency.
The Treasury Department designated China as a currency manipulator on Monday night after Trump accused them of being one in a tweet. Trump said in the tweet: “This is a major violation which will greatly weaken China over time.”
He tweeted later in the day that it is “now even more obvious to everyone that Americans are not paying for the Tariffs – they are being paid for compliments of China, and the U.S. is taking in tens of Billions of Dollars.”
China also confirmed earlier reports that it was suspending the purchases of U.S. agricultural products.The U.S.-China trade war has been going on since last year, dimming sentiment and the outlook for corporate profits and economic growth.
· The U.S. Treasury Department on Monday designated China as currency manipulator, a historic move that no White House had exercised since the Clinton administration.
“Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator,” the Treasury Department said in a release. “As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”
“In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department added. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain unfair competitive advantage in international trade.”
· President Trump’s latest volley in the trade war brought what strategists say is the strongest response yet from China -- a weakening of its currency to a key threshold markets once thought was a red line.
Risk markets sold off and investors rushed into safety plays, like Treasurys, out of concern that the latest escalation means a trade deal cannot be reached and risks of a global recession are now higher than they were.
Investors are watching the currency market closely for more moves by the Chinese, but as far as the trade war goes, the next moves will be up to Trump which labeled China a “currency manipulator” after U.S. markets closed.
“China can control its currency without having to intervene. They can squeeze the Hong Kong offshore market, and they and do it through interest rates, and they can also raise the margin requirements for having short forward positions,” said Chandler. “They can set the reference rates. There are policy tools they can use..There’s a lot of things China can do to move their currency which is part of the U.S. argument. They’re not very transparent.
Jackson said China could just decline to engage in further negotiations. “Talks are meant to restart at some point in September. We might see more noise as those approach if the trade war were to escalate,” Jackson said.
· The yuan fell to 7 against the dollar earlier in the session for the first time since 2008.
China let its yuan weaken below 7 to the dollar on Monday, an 11-year low, adding to broad risk aversion on concerns about the escalation of the U.S.-China trade war.
The offshore yuan CNH=D3 fell to 7.1265 per dollar, an all-time low.
The dollar fell 0.3% versus the yen JPY=EBS to 105.61. The greenback earlier slipped to 105.51 yen, the lowest since a flash crash in January that roiled currency markets.
The euro EUR=EBS rose 0.3% versus the dollar to $1.1238, its strongest level since July 19.
The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 97.234 after declining from levels around 98.0 yesterday.
Investors dumped export-oriented Asian currencies and rushed into safe havens, with the Japanese yen surging to a seven-month high.
Beijing on Friday vowed to fight back against U.S. President Donald Trump’s decision to impose 10% tariffs on $300 billion of Chinese imports, ending a month-long trade truce.
Trump on Monday called the Chinese currency move a major violation and currency manipulation.
The escalation of the trade dispute has increased speculation that the United States may act to weaken the greenback, though direct intervention is still viewed as unlikely.
· Trump has aimed to weaken the dollar through comments on Twitter that include pressuring the Federal Reserve to cut rates. The greenback dropped 0.86% against the euro as Treasury yields fell and traders priced in more rate cuts this year.
· Interest rate futures traders are pricing in a 100% chance of a rate cut at the Fed’s September meeting, with the odds of a 50 basis point rate cut jumping to 30% on Monday, from only 1.5% on Friday, according to the CME Group’s FedWatch tool.
· Japan’s yen, which investors buy in times of risk aversion, rose to its highest since a January flash crash. The yen was last up 0.59% at 105.95. Japan’s top currency diplomat, Yoshiki Takeuchi, warned that Tokyo was ready to intervene if yen gains threatened its export-reliant economy.
· China sets its yuan midpoint at stronger than 7 per dollar
After China’s currency weakened beyond a closely watched level on Monday, the country’s central bank set the yuan’s official reference point at stronger than that point on Tuesday.
On Tuesday morning, the People’s Bank of China set the yuan fixing at 6.9683.
· The yield on the benchmark 10-year Treasury note fell below 1.74% on Monday, its lowest level since November 2016, after China countered new U.S. tariffs, escalating the protracted trade war between globe’s two biggest economies.
The yield on the benchmark 10-year Treasury note, used as a benchmark for mortgage and auto loan rates, fell 12 basis points to 1.735%, its lowest level since Nov. 9, 2016. The yield on the 30-year Treasury bond fell 9 basis points to 2.293%, while the rate on the 2-year Treasury dropped 12 basis points to 1.581%. Bond yields move inversely to prices.
The 10-year Treasury note yield, down more than 30 basis points in August, returned less than the 3-month Treasury bill at 2.017%.
· Bitcoin soared 9% on Monday, performing like a safe haven asset as it edged past $11,000 for the first time since around mid-July.
The price of the world’s largest cryptocurrency climbed as high as $11,860, according to CoinDesk data, hitting a more than 3-week high. Bitcoin’s value now accounts for nearly 70% of the global crypto market, according to CoinMarketCap.
Analysts have previously argued the case that bitcoin could be a safe haven asset, with investors having flocked to the digital asset in the past on the back of an escalation in U.S.-Sino tensions.
· Global oil benchmark Brent futures fell more than 3% on Monday on global growth concerns after U.S. President Donald Trump last week threatened China with more tariffs, which could limit crude demand from the world’s two biggest buyers.
Brent crude fell $2.08, or 3.36%, to settle at $59.81 a barrel. U.S. West Texas Intermediate (WTI) crude futures fell 97 cents, or 1.74%, to settle at $54.69 a barrel, finding some support from a draw in inventories at the Cushing, Oklahoma, storage hub and delivery hub for WTI.
Reference: CNBC, Reuters
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