Recent events indicate that the US-China trade negotiations will not go the easy way. The appetite for risk suffers again, although at the end of last week, attempts at cheerfulness were noticed.
It is worth paying attention to the fact that on Monday, the volatility in the Chinese yuan was going off scale. The currency has realized the maximum daily decline in the last 9 months, having reached the level of 6.9065 paired with the US dollar. The last time the yuan was so cheaply priced was during the global financial crisis. If things continue this way, then in the coming months, one dollar will be equal to seven yuan. Beijing is likely to use its huge foreign exchange reserves to prevent the depreciation of the national currency, which could trigger a strong outflow of capital.
Currently, investors are focusing on retaliation from China, which reported the introduction of duties on a number of American products from June 1 of this year. The news contributed to a further decline in risk sentiment. The main beneficiaries in the foreign exchange market are the Swiss franc and the Asian region's traditional safe-haven currency - the Japanese yen. At the beginning of the week, the dollar/yen pair lost 0.25% of its value and is near the 3-month low formed last week at 109.47.
Yen as a "tidbit"
Market participants began to bet that the Japanese currency would benefit from its defensive status if the trade conflict continued to worsen. However, despite a decisive breakthrough below 110, the yen still lacks credibility. Traders probably do not want to go too far in the absence of complete clarity of the situation. Many experts continue to demonstrate confidence that sooner or later the "posturing" of the two countries will exhaust itself and the bargain will be concluded. The United States and China do not benefit from a protracted and sharp conflict. The economies of both countries suffered from trade friction last year, and given the current slowdown in global GDP growth, a full-scale trade war can have devastating consequences.
If in the coming weeks the leaders of the two countries do not come to a compromise, then the yen may push the dollar through other levels of support.
There is another more interesting question at the moment. What happens if fear of a trade war disappears? Is it possible to return to the mark of 111? More likely than not, but only under the condition that the market is entirely confident that the danger has passed.
Aussie gives ground
The Australian dollar is extremely sensitive to changes in risk sentiment. In addition, it serves as a liquid intermediary in bidding related to China, Australia's largest trading partner. Tensions in the negotiation process put pressure on the aussie, which noticeably fell in price not only to its American counterpart. The decline was also recorded in relation to the Japanese yen, as well as the Canadian dollar.
On Wednesday, you should follow the data on the Chinese economy. If it does not reach the forecasts, it will reinforce the market's view that growth in China continues to slow down. In this case, the process of outflow of capital from emerging markets will accelerate, and the US dollar will strengthen the position.
Moreover, capital inflows to the United States will begin to accelerate inflation, which will give the Fed a reason to tighten policies, which, in turn, will cause a large-scale recovery of the dollar. If we recall the Reserve Bank of Australia's reluctance to raise the rate and the signals of the central bank on its possible decline, then prospects for the aussie look very gloomy.
The material has been provided by InstaForex Company - www.instaforex.com