Staying with the Chinese renminbi, our Head of Forex Strategy John Hardy warned in his latest update
that we have “peg-like” setup with a break above the pivotal 7.00 dollar level likely to push market volatility into overdrive. He wrote:
“The recent USD strength is pushing very hard on the USDCNY exchange rate and the CNY, or renminbi floor that has been established by China ahead of the 7.00 level is suppressing volatility in currencies as the world watches and waits whether the world’s most important exchange rate will remain contained.
The pressure on this level to give way is enormous as the Chinese currency remains overvalued on a real effective basis and as the country has moved to ease monetary policy to support its deleveraging efforts in recent months. This at a time when the Fed has continued to tighten policy via rate hikes and quantitative tightening (reducing its balance sheet), tightening USD liquidity the world over.”
As China is the world’s biggest importer of raw materials, a shift in its currency could have major ramifications considering the current trade war. A weaker yuan is likely to attract a response from the US and with that the risk to global growth will only strengthen. Other commodities in brief:
has seen relatively calm market conditions this past month with the negative impact of a stronger dollar being offset by supportive physical fundamentals. In the short term the market rout in global stocks and the risk of a weaker yuan are likely to keep the metal on the defensive. This despite talk of a future supply deficit and signs that buyers are struggling to find spot material after available inventories monitored by the London Metal Exchange sank to their lowest level since 2005.