One of the worst days of the year for equity markets yesterday elicited hardly more than a nod of the head from the currency market, even as the USDCNY rate, the world’s most important exchange rate, rose the most it has all year – close to 1% at one point yesterday to 6.88.
Trump’s language late yesterday on Chinese retaliation sounded milder than yesterday’s earlier tweets: "There can be some retaliation but it can't be very substantial,". Trump also said he would meet with Xi Jinping at the June 28-29 G20 summit. This likely means that the setup now is that we have a tense stand-off until the meeting, which still looks better than yesterday’s sharp escalation in the two sides’ rhetoric. The lack of further escalation saw a modest bounce in risk appetite overnight, further encouraged by more diplomatic language
from China’s side that both sides have “the wisdom” to come to terms.
The next step is a signal from China that it is amenable to a Trump-Xi summit on the sidelines of the G20 meeting (that could be a difficult ask if taking place under the shadow of fresh US tariffs on a further $300 billion of Chinese imports – might be more promising sign if the US holds back in actually implementing these, only threatening to do so in the event the sides can’t come to terms in late June).
If we do get that signal, market participants may feel emboldened to believe that China will hold the line on the USDCNY for now. Or could we see a tease just to the edge of 7.00 and at times beyond as a negotiating tactic? In any case, it is difficult to see why we should expect a significant further escalation until late June – leaving everyone hamstrung once again and likely with a directionless market. Chart: USDJPY
USDJPY has rebounded after yesterday nodding its head to the ugly sell-off in equity markets. Yesterday’s experience reminds us how weak the transmission of traditional risk-off into JPY strength has proven, and it is an interesting sign of half-hearted JPY support that the modest bounce-back in sentiment has seen almost all of yesterday’s sell-off reversed.