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China Isn't Devaluing Yuan for Weapon in US Trade Dispute

China Isn't Devaluing Yuan for Weapon in US Trade Dispute
(Dollar Photo Club)

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Friday, 29 June 2018 12:12 PM Current | Bio | Archive

Emerging Markets

Maybe it’s time to take a somewhat closer look at the world’s biggest emerging market, which is China.

After we have now seen the steepest drop of the yuan (CNY) since the devaluation in August of 2015, and a bear market in stocks (about 20 percent), which reminds us of the 2015-16 selloff, it remains an open question how the Chinese authorities will respond to all that.

The yuan, which is a “managed” currency, has fallen about 3 percent in the past two weeks as tensions with the U.S. over trade restrictions escalated. There is some speculation that China is effectively depreciating its currency as a weapon in the dispute, which I still don’t believe. The yuan (CNY) may depreciate past the 7 per dollar over the next 12 months, which is a level we haven’t seen since before China pegged it for a time during the global financial crisis.

When the People’s Bank of China (PBOC) is carefully managing the exchange rate, it opens to investors or speculators and to market participants the opportunity to guess what the PBOC’s policy is going to be, and that’s it.

China will still be left with the issue about the accumulative impact of domestic credit tightening on the economy and on earnings, and that’s set to weigh on stocks, though the biggest blow would be a forced tightening to halt a disorderly decline in the yuan (CNY).

Please take care, that is not going to go away whatever happens to the yuan (CNY) or the trade row with the U.S.

Inflation in the US and the EU

Today provided investors a nice reminder on why the Fed, but also the ECB will continue moving towards tightening monetary policy. The Fed’s favored inflation measure and the ECB’s formal inflation target, both came in basically in line with the Fed’s and the ECB’s targets for inflation.

The US headline PCE deflator came in at 2.3 percent year-on-year while the core, which excludes both food and energy and which is the most closely watched of all inflation readings, rose 2.0 percent year-on-year.

Personal income increased $60.0 billion (0.4 percent) in May, according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $63.2 billion (0.4 percent) and personal consumption expenditures (PCE) increased $27.8 billion (0.2 percent).

Meanwhile, the just released flash estimate for Euro area inflation in June came in at 2 percent, its highest rate since February last year and which is up from 1.9 percent in May and up from 1.3 percent in April and May. The June flash number was mainly boosted by higher prices of energy and food.

The narrowest core index which excludes energy, food, alcohol and tobacco, saw its yearly rate dip a tick to 1.0 percent while without just energy and unprocessed food, inflation similarly stood 0.1 percentage points lower at 1.2 percent.

This June inflation number is important as investors could do well to recall that European Central Bank Draghi has “insisted” repeatedly when oil prices were low that the headline inflation number was the one to watch for. It will be interesting to see if he will reverse his position now that the oil prices are high and could still move higher when we look for example at the “Iran situation.”   

EU Summit

At the European Union Heads of Government Summit a deal was reached early this morning (Friday) on measures to stem the flow of migrants into the EU and “spread” the burden of handling those who do come.

German Chancellor Merkel presented at 4:30 a.m. this morning an agreement containing the following points: boost border security, set up holding centers, send rejected asylum seekers home and, hereby meeting Italy’s key demand, overhaul rules for distributing migrants when a gateway country is “overwhelmed.”

You don’t have to be a pessimist to see that this so-called deal raises more questions than answers.

For German Chancellor Angela Merkel it still remains unclear whether the agreement will be sufficient to help stave off a revolt by her Bavarian sister party, the Christian Social Union (CSU), which could deprive her of a parliamentary majority and cause a serious crisis.

For the European Union (EU), more troubled times are probably on their way.

About Euro-linked investments, investors could do well remaining vigilant and certainly abstain from any form of complacency, let alone optimism.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
The yuan, which is a “managed” currency, has fallen about 3 percent in the past two weeks as tensions with the U.S. over trade restrictions escalated. There is some speculation that China is effectively depreciating its currency as a weapon in the dispute, which I still don’t believe.
inflation, europe, emerging, markets, investors
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2018-12-29
Friday, 29 June 2018 12:12 PM
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