Morning Commentary: Another One Bites the Dust

Foreign Exchange - Morning Commentary
Another One Bites the Dust
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Earlier in the week, the People’s Bank of China (PBoC) allowed USDCNY to trade above the closely watched 7 to 1 level for the first time in a decade.  By allowing the yuan to trade above 7 to 1, the PBoC has made its daily fixing a closely watched event.  To this end, the PBoC broke another milestone overnight by setting its daily fixing rate above 7 for the first time since 2008.  The daily fixing rate is the midpoint of the band for which the PBoC will allow the CNY to trade. 
 
While the fixing was the weakest fixing in over a decade, market reaction has been fairly calm.  Ultimately, the fix was stronger than expected, and the markets took this move as a sign that Chinese authorities are attempting to establish stability in the markets. 
 
The question now becomes, what does the future hold?  Although Chinese authorities have stated it doesn’t expect the yuan to continue to weaken significantly, allowing the currency to break a closely watched level does make further depreciation easier.  This potentially raises FX intervention on the US side as another potential issue in the US-China showdown. 
 
In the end, we still see US intervention as a last resort event.  The White House is unlikely to start intervening unless it is confident that it can sustainably weaken the dollar.  To this end, theory and real world evidence suggest that successful intervention would require 1) no Fed sterilization or 2) coordination with other central banks like with the Plaza Accord.
 
The issue the US is facing is that neither of these conditions are present.  Unsterilized intervention isn’t possible without violating the Fed’s congressionally-protected independence, and other countries will not coordinate with the US as they don’t see an issue with the USD’s current level.  Moreover, unilateral intervention would undermine the USD’s reserve currency status which would increase the risk premium or compensation that investors would demand to hold US assets.               
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The CNY was also helped by Chinese trade data that showed both imports and exports beating expectations.
  • EURUSD is up sharply on the session after drifting lower in the overnight session.  The catalyst for the spike up was news reports that Germany could make a U-turn on fiscal policy and issue new debt. 
  • After dropping to a seven-month low yesterday, oil is trading higher on the session after comments from Saudi Arabia that it would consider all options to support oil prices. 
  • Despite the increase in tensions, US-China talks scheduled for September are still expected to go through. 
  • The spread between Italian and German 10-year bonds hit its widest level in a month as, once again, Italy’s coalition government looks close to collapse. 
  • Japanese portfolio data showed Japanese investors to be net buyers of foreign bonds with US Treasury demand near the highs for the year. 
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list.
Copyright ©2019 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog