A hawkish cut from the Fed, further tariffs implemented by Trump, and a stable Nonfarm Payroll report swung the dollar to fresh 2017 highs and dragged it shortly back down again last week as volatility re-entered the G10 FX space. The DXY is currently sitting 0.6% off of Thursday’s highs with the risk-averse climate not playing into the dollar’s strength as fixed income markets continue to price a lower yield curve amidst heightened trade war rhetoric. Today, investors will be awaiting Donald Trump’s awakening to Twitter with the Chinese yuan breaking the 7.00 level. Trump has been quick to call out currency manipulators and slam the Fed for an uncompetitive dollar. Even though market forces have driven a weaker yuan, it will likely be ignored by the US President and be seen as an act of aggression in a simmering US-Sino relationship. On the data calendar, PMI’s are released this afternoon with the only top tier data released for the dollar on Friday with the Producer Price Index.
Sterling barely scraped itself off Thursday’s 27-month lows against the US dollar on Friday, but is once again under pressure this morning, and is the second biggest loser among the G10 currencies. A broad sell-off in currencies except safe havens due to this morning’s CNY depreciation was the driver. The only G10 currency with bigger losses this morning is the Australian dollar, which historically trades with a high correlation to China risk – highlighting the extent to which sterling remains vulnerable to falls in general investor risk appetite. Brexit has the potential to once again become headline news this week, with the Johnson Government reportedly in full preparation for a General Election. The week’s main data release will be the first release of 2nd Quarter Gross Domestic Product on Friday.
The euro is up this morning, after a miserable last week. Haven demand seems to be the immediate cause after investors scrambled to find safety in the wake of this morning’s CNY devaluation. The fact that the euro is up despite the Eurozone economy’s sensitivity to global growth is interesting. With Germany’s economy teetering on the brink of recession and the latest Chinese data weakening, the Eurozone itself is not immune to increased China risk. The fact that the euro is up this morning highlights the extent to which any “safe” currency is trading with a premium.
The loonie weakened further this morning as oil markets took a hit in a risk-off climate. Boiling tensions between the US and China adds further negativity to global oil demand. This theme is likely to stay relevant this week with the Canadian data calendar being quite sparse this week. Housing data is released on Thursday, prior to July’s labour market report on Friday.
The Chinese renminbi followed Friday’s weakness with an astonishing bout of depreciation this morning, as authorities allowed the onshore yuan to weaken to levels not seen in the past decade. The offshore currency reached an all-time low. The political, economic, and market consequences of the sharp devaluation has the potential to be immense – when the yuan similarly depreciated in 2015 capital outflows forced authorities to spend in excess of $100bn in FX reserves in supporting the currency. Politically, the devaluation is almost certain to worsen relations between the US and China and is all but guaranteed to prompt a US response. Last week’s threatened tariffs are highly likely to become a reality by September, with the risk of another increase to a 25% tariff on all Chinese imports now the main downside risk. Emerging market currencies are a sea of red this morning, and are likely to remain so barring a surprise easing in US-China tensions.