Monday and the first full week of August start spectacularly. Price changes in many asset classes after several hours of trading are significant - from the bond and equity market to the currency market. The last one allows us to ask again whether we will see a currency war?
The Chinese yuan weakened above the level of 7.00 per dollar for the first time since 2010, fueling speculation that China will expand the US trade conflict over the currency war. With the escalation of the trade war, it seems possible that China may increasingly devalue the yuan. There was also information that the Chinese government had asked state-owned enterprises to suspend imports of US agricultural products.
Japanese yen and Swiss franc are definitely strengthening in relation to other currencies after last week Donald Trump announced that from September 1 will impose another 10 percent tariffs on Chinese goods worth USD 300 billion. In just three days, USD/JPY fell by more than 350 pips, which is a significant move. Yen and franc gain as a so-called safe haven to which capital returns with increasing risk in the markets.
It is worth noting that the investors also returned to the gold market. The price of this metal has increased to the highest level since May 2013. Thus, the high established in July this year was broken, and an ounce of gold is worth over USD 1,455. We should also pay attention to what is happening with the prices of US bonds that have skyrocketed again. Investors seem to be buying a safe American debt, at the same time lowering its yields, which may also translate into a weaker dollar.
Meanwhile, stock indices and oil prices are falling. The escalation of the conflict raises concerns about slower global economic growth, less demand for oil and, above all, lower profits for companies. Lower profits may mean smaller investments, looking for savings, possible lower wages for employees, etc. In other words, a threat to the entire economy. Therefore, the interest rate market is already pricing-in with an almost 80-percent probability that the Fed may cut the interest rate by 25 basis points already in September.
Due to the lack of important US data in the macroeconomic calendar for this week, it seems that investors could pay special attention to the further actions of the US and Chinese presidents.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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