Dollar Gives Back Part of Monday’s Sharp Gain against the Yuan

August 6, 2019

The yuan yesterday had slumped to 7.0525 per dollar, its weakest level since May 2008. In response, the U.S. Treasury released a protest, labeling Beijing a “currency manipulator.” This is the first such designation since 1994. By law, the Treasury reviews the currency policies of foreign governments every six months. The most recent review was done three months ago. While again concluding that China did not meet all three criteria for being a currency manipulator [1) a material global current account surplus, 2) a significant bilateral trade surplus versus the U.S., and 3) persistent one-way intervention to prevent currency alignment with economic fundamentals], the report in May went on to warn that “Treasury continues to have significant concerns about China‚Äôs currency practices, particularly in light of the
misalignment and undervaluation of the RMB relative to the dollar.”

Currency manipulation is in the eyes of the beholder. Just a couple of weeks ago, the IMF issues its latest forex steady, which concluded that the Chinese yuan is fairly valued in light of current economic fundamentals. Moreover, the Treasury’s impulsive declaration yesterday violated the protocol of acting only after thorough 6-month reviews and, in doing so, disregarded that all three criteria are not being met. Chinese central bank officials denied the currency manipulator accusation and predicted such a move will hurt many economies including America’s and also risks general financial market chaos. At the same time, China took some steps today to defuse the escalating trade dispute, telling business leaders that the yuan will not keep falling and selling yuan-denominated bills to counter short sales of its currency, and by setting a reference point today for the yuan that while still weaker than 7.0 per dollar is 0.4% firmer than yesterday.

Against other currencies at present, the U.S. dollar shows overnight appreciation of 0.4% against the yen, 0.3% versus the Swiss franc, and 0.1% relative to the euro, loonie and kiwi. At the same time, the dollar has eased 0.2% against sterling and 0.4% relative to the Australian dollar.

Part of yesterday’s huge equity market losses have been trimmed so far today. The DJIA is currently up 0.7%, and even smaller rebounds have occurred in Europe. In the Pacific Rim, by contrast, share prices on Tuesday lost another 2.4% in Australia, 1.7% in New Zealand, 1.6% in China, 1.5% in South Korea and 0.7% in Japan.

The ten-year Treasury yield has risen four basis point and its British,and Japanese counterparts are 2 basis points firmer. Among commodities, oil and gold strengthened 0.4% and 0.1%.

The Reserve Bank of Australia Board kept its official cash rate unchanged at 1.0% at this month’s review, following back-to-back cuts of 25 basis points each in June and July. The RBA has a history of changing the rate in pairs rather than through a string of moves, having cut in May and August of 2013, February and May of 2015, and May and August of 2016. A released statement today maintained the projection that inflation is apt to rise gradually in the future but modified the forecast slightly by noting “it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.” An extended period of very low interest rates will be needed to generate sufficient growth to achieve the inflation goal.

Released Japanese data today show a greater-than-forecast drop in the indices of leading and coincident economic indicators in June. Average labor cash earnings were 0.4% higher than a year earlier in June, and on-year 2.7% growth that month in real household spending was twice as much as forecast.

Australia experienced a record monthly trade surplus of A$ 8.03 billion in June, and the first-half surplus of A$ 34.2 billion was four and a half times wider than that in the first half of 2018.

Second-quarter New Zealand labor market statistics revealed a drop in the unemployment rate to an 11-year low of 3.9% and respective quarter-on-quarter and year-on-year gains in average labor costs of 0.8% and 2.1%.

South Korea’s current account surplus in June, $8.38 billion, was at an 8-month high.

Filipino consumer prices rose 0.2% on month and by 2.4% from a year earlier in July. That was the largest 12-month increase in two years.

But consumer sentiment in Indonesia fell 0.9% to a 4-month low.

German industrial orders data for June led today’s European menu of releases. Orders rebounded 2.5%, their biggest monthly rise in 10 months following a 2.0% slide in May. This greater-than-forecast rebound left orders still 3.6% below the year earlier lever and resulted in a 1.0% second quarter drop from the 1Q level. In June, export orders increased 5.0%, while domestic orders fell 1.0%.

Germany’s construction purchasing managers index printed at 49.5 in July, a 16-month low. Italy’s construction PMI also was south of 50, a 2-month low of 49.8, but the French construction PMI of 52.4 was at a 7-month high. This limited the dip in Euroland’s overall construction PMI of 50.6 to 0.2 index points.

Dutch CPI inflation rose 1.0% in July, its largest 12-month advance in a year, but this resulted in a 12-month advance of 2.5%, down from 2.7% in June.

A 3.8% year-on-year drop in Czech industrial production in June was the most in 35 months. And the Czech trade surplus of CZK 45.37 billion in June represents a 4-month low.

Irish industrial output in June recorded the largest monthly decline (8.8%) in six months and the biggest 12-month drop in five months (1.7%). The Irish services purchasing managers index dropped 1.9 points to a 3-month low of 55.0, and the composite Irish PMI of 51.8 signified the slowest pace of positive growth in 74 months.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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