All the comdolls took a beating when word got around that China is mulling about the possibility of devaluing the yuan as a tool in trade negotiations. And among the comdolls, it was the Aussie that took the brunt of it.
- German trade balance: €19.2B vs. €23.1B expected, €21.5B previous
- Japan’s economy watchers current index: 48.9 vs. 48.1 expected, 48.6 previous
- Halifax U.K. HPI m/m: 1.5% vs. 0.1% expected, 0.5% previous
- Sentix Euro Zone investor confidence: 19.6 vs. 20.8 expected, 24.0 previous
China planning to devalue the yuan?
According to a Bloomberg report that cited unnamed “people familiar with the matter,” Senior Chinese officials are supposedly looking into the possibility of devaluing the yuan “as a tool in trade negotiations with the U.S.,” as well as to tool to “offset the impact of any trade deal that curbs exports.”
However, the unnamed people stressed that: “The analysis doesn’t mean officials will carry out a devaluation, which would require approval from top leaders.”
Trade war chatter
Foreign Ministry Spokesman Geng Shuang held a press conference earlier and he warned that “Under the current circumstances, both sides even more cannot have talks on these issues.”
U.S. President Trump, meanwhile, was up early and tweeted the following:
When a car is sent to the United States from China, there is a Tariff to be paid of 2 1/2%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%. Does that sound like free or fair trade. No, it sounds like STUPID TRADE – going on for years!
— Donald J. Trump (@realDonaldTrump) April 9, 2018
BOJ Shogun Kuroda was speaking in a news conference earlier. And, well, he basically repeated the BOJ’s message that inflation still has some ways to go and that monetary policy ain’t budging anytime soon when he said that:
“The economy and prices are doing quite well now but there’s some distance to achieving 2 percent inflation.”
“It’s inappropriate to tighten policy or diminish monetary support to create policy room to cope with a future downturn in the economy.”
Other than that, Kuroda also reinforced the idea that the BOJ has a tightening bias. It just so happens that the Japanese economy is not ready for tighter monetary policy.
To quote from Kuroda himself:
“I think the process of any shift [from the BOJ’s super loose policy] would be cautious and gradual, as with U.S. and European central banks.”
Some risk-taking to start the week
Europe is apparently starting the new trading week on an optimistic note since the major European equity indices were broadly higher during the morning London session.
And according to market analysts, the risk-on vibes were due to deal-making activities, as well as hope that China and the U.S. will see reason and try to talk things out in order to avoid a disastrous full-scale trade war (despite the trade war chatter).
- The pan-European FTSEurofirst 300 was up by 0.40% to 1,474.89
- Germany’s DAX was up by 0.74% to 12,332.42
- The blue-chip Euro Stoxx 50 was up by 0.65% to 3,424.75
U.S. equity futures were also in positive territory, pointing to the possibility that risk-taking will persist into the upcoming U.S. session.
- S&P 500 futures were up by 0.67% to 2,623.25
- Nasdaq futures were up by 0.88% to 6,511.50
Major Market Mover(s):
All the comdolls (AUD, NZD, CAD) were hammered hard at the start of the session, apparently as a reaction to the Bloomberg report about China’s supposed plan to devalue the yuan “as a tool in trade negotiations with the U.S.,” as well as to tool to “offset the impact of any trade deal that curbs exports.”
Basically, China is also supposedly looking into currency warfare as well.
Anyhow, it’s interesting to note that it was the Aussie that got the worst of it, likely because gold was down at the time.
However, it’s also worth noting that the Aussie took the plunge when China devalued the yuan back in 2015.
From a fundamentals-based perspective, devaluing the yuan is bad for the Aussie because the Australian economy is heavily driven by commodity exports (that’s why it’s a comdoll). And China happens to be Australia’s main export market. However, a weaker yuan means Australia’s exports become relatively more expensive, which will weaken demand for Australian exports.
Also, a weaker yuan may lead to a stronger U.S. dollar, which may then pull down on AUD/USD and drag other AUD pairs lower with it.
AUD/USD was down by 30 pips (-0.40%) to 0.7661, AUD/NZD was down by 21 pips (-0.20%) to 1.0511, AUD/CAD was down by 22 pips (-0.22%) to 0.9798
NZD/USD was down by 14 pips (-0.20%) to 0.7288, NZD/JPY was down by 18 pips (-0.23%) to 78.02, NZD/CHF was down by 17 pips (-0.25%) to 0.6991
USD/CAD was up by 23 pips (+0.18%) to 1.2789, EUR/CAD was up by 36 pips (+0.23%) to 1.5710, GBP/CAD was up by 56 pips (+0.31%) to 1.8056
If the Aussie was the worst-performing currency of the morning London session, then what was the top-performing currency?
Well, that happens to be the pound. The pound largely fed off the comdoll weakness, but some market analysts also pointed to reinforced BOE rate hike expectations due to the stronger-than-expected Halifax HPI reading.
GBP/USD was up by 18 pips (+0.13%) to 1.4118, GBP/AUD was up by 101 pips (+0.56%) to 1.8429, GBP/NZD was up by 66 pips (+0.34%) to 1.9372
Watch Out For:
- 12:15 pm GMT: Canadian housing starts (219K expected vs. 230K previous)
- 2:30 pm GMT: The BOC’s business outlook survey will be released