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Chart of the Day: USDCNH

We were still debating the merits of the FOMC meeting when, just like that, we see a tweet from US President Donald Trump cause huge gyrations in financial markets. The fact that he announced a 10% tariff on the remaining US$300bil of Chinese exports was always a risk the market had in its sights. But few were positioned for it to be rolled out at this juncture. Obviously, the recent dialogue with the Chinese bore little fruit. Trump has clearly been underwhelmed by the lack of China’s buying of US agricultural products, not to mention a clear reduction of Fentanyl exports.

Chart of the Day - Aug 2, 2019 - USDCNH, daily

The problem for the US is consumption is growing at over 4%, and was the backbone of the Q2 GDP print of 2.1%. So, consider the tariffs applied to this group of Chinese exports cover and affect consumer-based products, it’ll represent a more direct tax on the US consumer. Consumption could therefore be negatively impacted. While it increases the prospect of a rate cut from the Federal Reserve in September, it also raises the anticipation that the People’s Bank of China will allow a depreciation of the yuan to offer US importers greater purchasing power.

One to watch: USDCNH has come back on the radar as a great representation on the US-China trade tensions. We can already see the CNH (yuan) weaken, breaking through recent supply levels. A move into the 7.00 will get a huge amount of attention, and promote higher volatility in global markets.

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