Morning Commentary: Much Ado About Nothing…For Now

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

Much Ado About Nothing…For Now Share this story: Andrew Kositkun Foreign Exchange Head Trader

The Chinese yuan moved below 7 this week for the first time since March.  An upside surprise to China’s June PMI numbers set the stage for bullish sentiment that was then amplified by this week’s strong equity rally.   While the yuan only broke below 7 this week, bullish momentum has been building since the end of May.  Prior to the end of May markets were concerned over renewed US-China tensions.  However, harsh rhetoric failed to materialize into significant economic action.  This has allowed for a reduction in CNY risk premia as markets to look past concerns around rising tariffs and a failed Phase 1 trade deal and refocused on re-opening momentum.  Near term, supportive interest rate differentials and the market’s continued discounting of geopolitical risks opens up room for further yuan strength.  However, Chinese officials are unlikely to allow significant appreciation.   Over the medium term risks still remain with the US considering sanctions and/or boycotts on a variety of issues.  Yesterday the key headline focused on the potential for the US to undermine the Hong Kong dollar peg.  My view would be to fade these headlines as such action is highly unlikely.  Instead the focus should be on the potential sanctions on Chinese banks.  Additionally, risks still remain on China falling behind on its Phase 1 deal obligations.  Being tough on China should remain a key campaign issue and this makes it likely that US-China rhetoric will worsen as we get closer to the election.  In a nutshell, this is the predicament that the yuan finds itself in.  Economic data and the resulting growth differentials support the currency.  Yet it is important to remember that policy has a strong influence over the currency with geopolitical risks holding a dominent role in the yuan’s valuation.  That makes signals from policy makers a key guide for price action.  With US-China geopolitical risks likely to increase, yuan should remain vulnerable to depreciation.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The global number of COVID-19 cases now exceeds 12 million.  Outside of the US, numbers are increasing in Hong Kong, Japan, Australia and Mexico.  In the US, California set a new record on its daily increase in new cases and Texas a second day in a row of record deaths.     US initial jobless claims came in better than expected with 1.31 million claims filed against expectations for 1.38 million claims.  Last week’s number was also revised down to 1.41 million from 1.43 million.  Continuing claims also beat expectations at 18.1 million against expectations for 18.8 million.  While these numbers were better than expected, they still remain extraordinarily high and suggest that the labor market remains under pressure despite economies re-opening.  Democratic presidential candidate Joe Biden will give a speech today on his economic plan.  Based off reports, Biden’s plan will stick closer to a centrist path than a progressive one.  Biden’s plan is expected to call for a boost to manufacturing and innovation with progressive ideas like the Green New Deal and Medicare for All shelved for now.   UK Chancellor Sunak’s Summer Statement announced additional stimulus of GBP30 billion on top of GBP160 billion that was previously announced.  The new stimulus focuses on employment support.  Other measures including a VAT cut for tourism and tax cuts for the housing market.  China’s Shanghai Composite recorded its 8th straight day of gains.  The Shanghai Composite index is up ~16.25% on the month.

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 ©2020 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