US/China tensions escalate:
Chinese officials took the US tariff hike quietly last week but struck back today. The PBOC fixed the dollar higher (CNY6.90), which it has not done, and will halt imports of US agriculture. The dollar shot through CNY7.0 to finish the mainland session a little above CNY7.03 and CNH7.07 for the offshore yuan. This has sent ripple effects through the global equities, which were already on the defensive at the end of last week. President Trump has been haranguing for lower interest rates, and he is set to get them. The trade conflict can be walked back, but this does not seem like the most likely scenario at the moment. China appears to have all but given up on the ability to strike a deal with the US, even though economists mostly argue that the trade surplus country will be hurt more than the trade deficit country in such a dispute. Markets now expect another rate cut at the FOMC meeting on September 18th.
Canadian dollar highlights:
The US dollar briefly traded below CAD1.3200 and tested CAD1.3240 in both Asia and Europe yesterday. Most analysts are expecting a little more stability into today’s North American session. The Canadian economy is among the strongest of the high-income countries. It is one of the few not considering easier monetary policy. It has already absorbed a shock from antagonizing China. The Canadian dollar may offer an alternative to those international investors seeking to diversify away from the US dollar. That said, risk extends toward CAD1.3300.
The escalation of the US-Chinese trade conflict will not do Europe any favors. It comes as the eurozone is struggling. The euro has bounced smartly off last week lows near $1.1025. It approached $1.1140 in the European morning. The next hurdle looks to be in the $1.1160-$1.1180 range. Establishing a foothold above $1.12 would give some hope of a durable bottom. The Sino-American conflict may take some pressure off Europe, which had appeared headed for a clash with the US over a range of issues. Before the weekend, the US made much fanfare over an opening of the European beef market to American producers, which had already been in the cards.
British pound highlights:
Brexit, and in particular the prospects of a no-deal exit overwhelm other considerations, but a world that is less open to trade does not seem particularly conducive for the UK to strike out on its own. Sterling was turned back after briefly taking out the pre-weekend high (~$1.2170). Last week's low was $1.2080, but it does not appear set to hold very long. Sterling has traded below $1.20 only on two occasions since the mid-1980. One was the flash crash low from October 2016 that Bloomberg has near $1.1840. The other was January 2017, and the penetration was minor and brief.