Still on Yuan Watch

The USDCNY fixing below 7 had a soothing effect with global equities reversing earlier losses, but this is about China proving a point. By rolling out their first trade war Howitzer, the Pboc conclusively demonstrated its capacity to steer global markets while effortlessly neutralising the “currency manipulator” tag that could have mushroomed into overblown proportions.

Permitting the currency to move above CNY7 and then nudging it back below signals to the US that China has full control of the Yuan, demonstrating they can quickly weaken as a tariff offset, at will.

While the PBOC continues to toe the line that they will not weaponise the Yuan in the trade spat, but they have demonstrated that they have also demonstrated they have a brawny tool at their disposal.

Markets have gone full circle again hoping for the best while preparing for the worst where even the tiniest gestures could see investors could respond more positively than warranted given how emotionally invested market participants are as trade war remains intricately interwoven into the tapestry of virtually every trading decision.

Over the short term, this currency calm does signal openness to talk and could lead to more positive price action, but over the medium term based on a year-long track record of one step forward two steps back the state of affairs by all appearances will probably deteriorate further and increasingly impact the global growth outlook. Which means safe havens should remain in fashion.

Gold markets

Gold remains bid despite an equity and USD comeback; supported by looming trade war risks as the increasing trade tensions will regressively impact the global growth narrative. Suggesting the Fed will be forced to make another dovish about-face which will drive the demand of Yen, Franc and Gold.

Escalating US Sino trade tensions and financial market and geopolitical uncertainty, continue to overwhelm risk on the sentiment so, despite equity market showing some signs of life, global risks remained elevated enough, and risk-off sentiment strong enough, to continue to support and push Gold prices higher.

Oil markets

With traders teed up to sell into an API inventory bounce, the larger than expected draw was unable to boost prices. But a bearish signal none the less when a bullish inventory draw fails to get a rise out of the market who obviously have bigger fish to fry today.

But more damning for price action is that traders are now pricing in worst-case scenarios as the prospects for a full-blown global trade war are looking increasingly likely by the week and it is trade war where traders will be taking their cues as to where oil is headed next.

While omnipresent risk in the Middle East, slowing US supplies and OPEC compliance continues to support fundamentals for oil. The imminent and ever-present peril from the US-China trade spat will continue to hang like an anvil above the head of the global economy, so it is challenging to see sentiment improving any time soon.

The Euro

US yields are falling faster than the rest of the worlds and with UST -Bund differentials compressing to the lower level in 18 months the EURUSD remains anchored to 1.1200 level in early trade.

The Malaysian Ringgit

The Ringgit continues to trade off the back foot weighted down by the prospect of escalation trade tensions and a deep dive lower in oil prices overnight

This article was written by Stephen Innes, Managing Partner at VM markets LLC