U.S. designation of China as a “currency manipulator” shifts trade frictions to the realm of exchange-rate policy [From Tetsu Kurokawa’s Tomo Newsletter]
From the real trading newsletter “Tetsu Emori's Real Trading Strategy” by Tetsu Emori provided by GogoJungle, here is a small excerpt from this morning's issue.
〔CURRENCY MARKET〕
USD/JPY rose. As concerns over the US-China trade war eased slightly, the yen was sold, pushing the pair into the mid-106s. The U.S. Treasury on the 5th designated China as a currency manipulating country, but on the 6th the People’s Bank of China set the yuan’s reference rate (central parity) at 1 dollar = 6.9683 yuan, a firmer level than market expectations. Additionally, a plan to issue 30 billion yuan (equivalent to 4.25 billion dollars) in yuan-denominated bonds was announced in the offshore market of Hong Kong. In response, yuan’s exchange rate in the Shanghai FX market halted its decline. As a result, concerns over further deterioration in US-China tensions eased, and the yen, previously a safe-haven asset, came under selling pressure. Moreover, the late-day surge in U.S. stocks and the rise in U.S. long-term rates from the previous day also encouraged selling of the yen and buying of the dollar. The euro-dollar traded near 1.12. Meanwhile, the Reserve Bank of Australia (RBA) held its regular board meeting and kept the policy rate at 1.00%. To assess the effects of two consecutive rate cuts of 0.25 percentage points at the two previous meetings, it maintained its monetary policy as expected. Governor Lowe stated in a press release that policy would be further eased “as needed,” referring to the possibility of additional cuts. In Australia, uncertainty about the outlook for consumer spending is rising, and markets expect further rate cuts within the year. Governor Lowe said that “to achieve improving unemployment and the target of subdued inflation, a prolonged period of low rates is necessary.”
【Currency Trading Strategy】
We close the short USD/JPY. It seems that indirect intervention was implemented. The accuracy is uncertain, but it appears GPIF (Government Pension Investment Fund) bought foreign equities and foreign bonds, leading to selling of the yen and buying of the dollar. When that happens, there is little we can do. We must understand that the government is using public funds for such actions and face the market accordingly. That said, the trend has not broken. We may see some range-bound movement for a while, so I’d like to observe a bit longer. Then, I would consider selling if the 105.50 level breaks.
The euro is rebounding, and the pound is holding off on declines. The U.S. is denouncing China’s yuan depreciation policy and aiming to push the dollar lower. In this situation, market moves are unlikely to be a one-way decline in European currencies as before. The dollar’s decline is quite effective. Of course, in the end, the yen will strengthen. Therefore, it is necessary to watch such “political moves.” As repeated, the FX market moves with politics. Understanding this is essential. Policy direction has become fairly clear. It is prudent to avoid easy expectations for yen weakness.
We do not know at what level the USD/JPY will bottom out. One possible factor is the year’s forecast for yen appreciation around 96 yen. This is a likely lower bound derived from the past 30 years of USD/JPY price movements. How far it can drop is uncertain, but until the trend changes, maintain short positions and set up to exit on a rebound. August tends to see lower stock prices and yen strength, but for now, barring extraordinary political forces, the current trend is unlikely to reverse. It is also important to be mindful of past data.
The Trump administration on the 5th designated China as a currency manipulator, linking the trade deficit issue to exchange rate policy. This is the first designation since 1994. The US-China confrontation has extended into currency policy, making prolonged trade frictions likely. President Trump stated on the 1st that he would launch a fourth tranche of punitive tariffs on all imports from China in September. In response, Chinese authorities on the 5th deliberately allowed the yuan to slip below the 1 USD = 7 CNY threshold, a level not seen in 11 years. China’s move into “unconventional” measures beyond retaliation tariffs signals a new phase in the US-China frictions.
Meanwhile, the United States has linked the currency policy to the trade deficit in its designation of China as a currency manipulator. President Trump has repeatedly criticized China and Europe for pursuing currency weakness favorable to exports. He has also urged the Fed to take countermeasures, and the Fed subsequently cut rates in July. While further calls for rate cuts at the Fed are likely, speculation has surfaced that the next move could be currency market intervention to push the dollar lower. The currency war between the US and China could unsettle global markets significantly.
One month after the June summit where they decided to temporarily pause the trade war, some point out that China has shifted to a wait-and-see stance and may negotiate with the next administration after Trump ends. Furthermore, the Ministry of Commerce announced a temporary suspension of purchases of U.S. agricultural products. It is seen as a tactic to pressure concessions from Trump, who may seek to deliver results ahead of next year’s U.S. presidential election. Although ministers-level talks between the US and China resumed for the first time in three months last week, there has been little visible progress, and the next round of talks slated for early September is not guaranteed to occur. Market volatility remains likely.
As repeatedly noted, August is likely to be a tricky month this year. Since the start of the year, May, August, and November have been the month dimensions of risk. May already had a sharp stock decline. August is next. The yen’s strength and stock declines are already appearing, but I intend to monitor cautiously whether the current trend persists. The final push should come in November, when I expect risks to be higher for U.S. stocks. I will watch for risk asset sell-offs. If the yen strengthens further, there is a possibility of it dropping to around 96 yen by year-end.
Also, although not based on concrete evidence, August could see earthquakes as well. There was an earthquake in Fukushima. It feels ominous. Since it could directly affect yen strength and stock prices, I want to ensure proper preparation.
I will change the currency pairs targeted for investment strategy. Since emerging market currencies are highly volatile, I will exclude them. I will primarily trade major currency pairs.
The targets will be USD/JPY, EUR/USD, GBP/USD, AUD/USD, NZD/USD, and USD/CAD.
Currently, the Canadian dollar and NZ dollar are the strongest currencies.
USD/JPY: None
EUR/USD: None
GBP/USD: Short
AUD/USD: Short
NZD/USD: Short
USD/CAD: LongEUR/JPY: Close short
GBP/JPY: Short
AUD/JPY: Close short
NZD/JPY: Short
CAD/JPY: Close shortEUR/GBP: Long
EUR/AUD: Long
GBP/AUD: None
EUR/NZD: Long
GBP/NZD: Close short
EUR/CAD: New long
GBP/CAD: Short
AUD/CAD: Short
NZD/CAD: Short
From “Tetsu Emori's Real Trading Strategy” (Tetsu Emori)quoted.
With the United States designating China as a currency manipulator, US-China trade frictions affecting currency policy are certain to worsen and become more prolonged. As global stock markets fall together, as Mr. Emori mentions, it is important to monitor political developments and thoroughly review past data. (Editorial staff)
