Morning Commentary: Tit for Tat

Foreign Exchange - Morning Commentary
Tit for Tat
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Overnight, China said that it would sanction 11 Americans in retaliation for similar measures from the US.  As a reminder, last Friday saw the US sanction a similar number of Chinese officials, including Hong Kong Chief Executive Carrie Lam, for their roles in the crackdown on Hong Kong. 

For China’s part, the country placed sanctions on US Senators Rubio, Cruz, Cotton and Toomey; Congressmen Chris Smith; and leaders of organizations such as the National Endowment for Democracy and Freedom House.  It is still unclear that the sanctions would entail.

This back and forth is just the latest in a flurry of activity between the two countries.  Beyond sanctions, other recent flashpoints between the US and China include the US Secretary of Health and Human Services’ visit to Taiwan and the Hong Kong police’s raid of the city’s largest pro-democracy newspaper. It should be noted that HHS’ Alex Azar praised the Taiwan for its democracy and President Tsai Ing-wen’s response to the pandemic during his visit to Taiwan.

For the market’s perspective, equities have moved much more than the currency markets.  As an example, Tencent Holdings’ stock has sold off sharply for two consecutive days, losing over $66 billion in market cap after the US moved to ban businesses from doing business on the company’s WeChat app. 

However, the currency markets, which is more representative of the overall US-China relationship, continues to shrug off these headlines with the Chinese yuan relatively unchanged from Friday’s close.  The market’s muted reaction represents the view that while further escalation is likely it will remain more saber-rattling than actions that actually impact the economy—at least for now.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • President Trump announced 4 executive actions over the weekend.  These executive actions include a temporary payroll tax deferral for some workers and the continuation of expanded unemployment benefits.  Lawmakers from both the Republican and Democratic parties have, to varying degrees, criticized the president’s actions as providing little real help and being an unconstitutional power grab from Congress.  It is likely that all four orders will be challenged in court for violating Congress’s power of the purse.  
  • Phase 4 stimulus talks remain at a standstill.  Top Democrats said they offered to reduce their proposal by $1 trillion dollars if Republicans raised their proposal by $1 trillion dollars.  However, Treasury Secretary Mnuchin said no concessions were made on unemployment benefits and state and local government aid.  To state the obvious, this political brinksmanship at its highest level with stakes extremely high.  Nearly 30 million Americans will take a hit to their unemployment benefits and state and local governments will be forced into further layoffs without aid.  As of this writing, it is unclear when talks will continue. 
  • Chinese CPI and PPI both came in slightly higher than expected.  PPI fell -2.4% YoY versus expectations for a -3.0% drop and CPI rose 2.7% against expectations for a 2.6% rise. 
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