Trade War Takes a Breather; Yuan Strengthens Back Below 7

The U.S. dollar took advantage of a rare calm in trade tensions and rose against a number of its rivals overnight. Still, the Dollar Index is flirting with a fourth day of losses.  In response to surprise tariffs announced last week, China allowed their currency to devalue past 7 yuan per dollar, which is largely seen as a “line in the sand.”  The move roiled markets and caused American equities to dump 3% of their value yesterday. After stock markets closed, the U.S. Treasury Department tagged China as a currency manipulator.  While President Trump campaigned on doing so “on day one”, the administration had declined to do so until yesterday.  The designation is mostly meaningless but signaled another escalation in the trade war. 

This morning, China set their fixing rate stronger than most expected and the yuan strengthened back below 7. China’s Central Bank also told foreign firms that the yuan won’t keep falling and they were not using their currency as a “tool” in the trade war. 

European equities, American futures and commodity prices have rebounded overnight which is a welcome sign, but China and the United States are far apart on a potential trade deal so expect the bumpy ride to continue.

The economic docket is light today.  St. Louis President James Bullard will speak at the National Press club in Washington.  Tempus will have representatives at the lunch to hear firsthand his explanation for the “hawkish cut” and to take his temperature for future Fed action.

In what is an increasingly rare occurrence, the British pound rose slightly versus the U.S. Dollar overnight.  Media outlets are pointing towards evidence that opponents of a no-deal Brexit are solidifying their positions, but we don’t necessarily buy that argument for today’s move.  We believe that GBP/USD is simply trying to carve out a new, lower range as traders attempt to price in the possibility of a no-deal Brexit in October. 

The Australian dollar was the biggest beneficiary of the brief calm in the trade war overnight.  Indeed, the beleaguered currency lead the G10 currency board.  The Australian dollar is often viewed as a proxy for China so it is prone to selling off when trade disputes kick up.  The Aussie dollar found additional support after the Reserve Bank of Australia left interest rates unchanged. 

Compliments of TempusFX,  a member of the EACCNY