Morning Commentary: Bouncing Back

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Bouncing Back Share this story: Andrew Kositkun Foreign Exchange Head Trader

The Chinese yuan has rallied this morning on the back of support from the Chinese government.  Overnight, the PBoC announced that it would issue new yuan bills in Hong Kong, a move that is aimed to tighten liquidity and showcase the central bank’s willingness to defend the currency.    Additionally, the yuan’s fix came in slightly lower than models would have predicted, implying the possibility of a slight bias from the Chinese government for a stronger currency.  Coinciding with these steps are reports that the US will grant a handful of temporary 90-day exemptions to its ban on US sales to Chinese telecom giant Huawei.  These steps mirror the actions the US took against ZTE last year.  Ultimately, Trump overturned the ZTE ban in exchange for Chinese concessions and price action appears to reflect the markets expectations for a similar path for Huawei.   While these steps have eased tensions for now, and is driving a rally in European and US stocks around the world, the trade conversation still remains very fluid and risks still remain for further escalation especially in light of the nationalistic shift in Chinese rhetoric. This then begs the question of what the market impact would be should the US impose a 25% tariff on all Chinese exports.    The most obvious first order impact would simply be the cost of the tariffs on goods as a 25% tariff would make things more expensive, although this is likely offset somewhat by the expected depreciation of the yuan.  The more concerning impact would come through what is known as second order impacts—the deterioration of business confidence and tighter financial conditions.  In models from the IMF, it has been estimated that these second order effects can be two to three times larger than first order impacts.    However, these second order impacts are notoriously hard to quantify, especially in China’s case as it is a command economy.  Case in point, the Chinese banking sector doubled in 2009 in the aftermath of the global financial crisis as credit around the world tightened.  Nevertheless, these second order effects merit monitoring as the negotiations between the US and China continue to evolve.      HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: GBP has moved sharply higher on expectations that PM May will present a new Brexit proposal in a speech today.  Her new proposal is expected to touch on workers’ rights, environmental protections and assurances on the integrity of the UK in the event that the backstop kicks in.     In yesterday’s commentary, we highlighted skepticism on the AUD’s move higher based on election results and pointed to Governor Lowe’s scheduled speech as a possible driver of AUD weakness.  The AUD finds itself lower today after Lowe’s dovish speech, and RBA minutes have reaffirmed the possibility for rate cuts.  Currently, markets are showing a ~95% chance of a cut this year.  Thailand reported soft GDP growth with Q1 growth coming in at 2.8%, the slowest pace since 2014.

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:

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 NMLSR ID# 536994 | City National Bank Member FDIC