Cool Video: CNBC Asia and Thoughts on CNY/CNH and JPY

A few hours after President Trump tweeted the end of another tariff truce with China, I had the privilege of talking with CNBC’s Asia anchors Mary Hungerford and Sri Jegarajah on the outlook for the yuan and yen.  The 2.45-minute video clip can be found here.

The new tariffs on China will likely further reduce its exports and act as a headwind on growth.  It increases the likelihood of a policy response to blunt the drag.  For these reasons, the yuan was marked down.  If anything, the PBOC again tried to control/influence the pace.   

There is nothing magical about the CNY7.0 level.  However, it represents a potential inflection point that could spur another leg higher for the greenback.  The PBOC wants to ensure an orderly move so as to minimize the risk of a vicious cycle of weaker yuan, sell-off in stocks, and more capital outflows.  I argue that despite the talk of race-to-the-bottom and currency wars, Chinese officials do not see a dramatically weaker yuan in its interest.  It would discourage Chinese companies from evolving to more value-added operations and it would slow the effort toward more domestic-driven consumption and activity.  

The dollar-yen exchange rate went on its own roller coaster ride. The idea that the Fed was not embarking on a sustained campaign to ease policy, but was rather engaged in a “midcourse correction,” initially lifted the dollar through the JPY109 ceiling.  But the escalation of the US-Chinese conflict drove US rates and equities lower and sent the greenback reeling against the yen.  It held above support seen near JPY107 in the US session but fell below in the Tokyo morning.  

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