Yuan’s Arising Sway in Markets

Last week we started to see a significant (two days) retracement on the stock markets worldwide starting from Japan passing through Europe; nevertheless, the US markets was the most affected. That was before markets rose at the end of the week.

Most analysts justified that by the big selling on banking sector, some others have noticed the oil movements. While all eyes were focused on the classic fundamentals, no one turned to the USD/Chinese Yuan chart. Despite the usual talks on the Chinese rising economic powers, investors couldn’t see the reflections of that influence on the reality. Everybody including me were dealing with China just as an emerging market, comparing it to the Brazilian and Indian economies. Red flags given by the technical analysis which I mentioned earlier last weeks in the weekly analysis reports were formed by the effects of the Chinese economic data and the American foreign policy. In this article I will try to highlight new dimensions for the recent other assets that are affected by the Yuan.

US Foreign Policy Shadows

No news when we say that the US is causing troubles with its allies, either we were talking about NAFTA, TTP, Paris climate agreement or even the NATO. The German anger was clear in Merkel`s speech after the NATO summit, when she said that the US president is not a reliable partner. I think that all the ongoing controversy on Trump`s action towards the foreign countries is deliberate. Remember when I wrote the article titled “The Effects of the US Presidents on the EUR/USD Movements“ the final idea through this article was that the Republican Party policy leads the USD to bearish trend. The current policy is not spontaneous, on contrary it is deliberate to depreciate the dollar, and that what happen with the USD/CNY pair last week. Yet, it is not the first time to see a big drop on the pair; it was the first time to see that strong reflex on the stock markets.

Despite the previous points, the most significant political stance is the pressures made by the white house on China to appreciate its currency. The white house targets 15% appreciation, with more easing on capital movement.

Chinese Economic Data

It seems that the Chinese Yuan price step by step is determined by the supply and demand. Since the inauguration of Trump, some bearishness occurred on the USD/CNY pair with no direct effect on the stock market. Last week the Dow Jones had some volatility accompanied with the drop of the pair.

The rise of the currency came after a successful fundamental data for May. The unemployment data dropped to the lowest since 2004, the inflation climbed to 1.2% for the third month respectively. The Balance of trade rose to 380.48 billion Yuan, the highest since March. Current account is at its highest since the last quarter in 2016 at 190 billion Yuan.

Oil Prices and Moody`s are Changing the Correlation

According to the CIA factbook, China came the fourth in oil production by 4 million Barrel a day, and the second importer by 6 million barrels a day. The negative correlation between the commodities prices and the dollar is a constant fact stayed for decades; nevertheless, that norm looked different since the start of this year. Dollar price is obviously moving with oil prices and against stocks, on the other hand the Yuan is currently moving against commodities. Oil, metal prices and other raw materials used in industry have dropped dramatically this year against the Chinese currency, while gold prices kept rising.

USD/CNY daily chart since January 2017 is showing identical movements with oil price chart for the same period.

Earlier this week Moody`s downgraded the Chinese debt, with more fears from the coming years` increasing in the dept. This specific event came just before the bullishness of the Yuan; nevertheless, the Yuan acted strangely as usual by moving higher.

Since 2005 the PBOC took the first step towards free currency by releasing what is called the managed pegged currency price by changing the price according to the government concerns. In 2015, the government announced again that it is welcoming the demand and supply system to evaluate the currency by putting a price close to the real FOREX market prices. Because of the huge irrational movements occurring on the USD and the Chinese currency pairs (onshore and offshore) after the managed pegged pricing led by the government, the PBOC replaced the managed pegged system by the ‘counter cyclical system’. The counter cyclical system prevents the investors from the sudden losses occurred by the aggressive movements of the currency, by managing the price to the real fundamental data.

Summary

• Markets formed a new correlation between the Yuan and the industrial commodities prices.
• The Yuan influence in the financial markets became substantial starting from this year.
• US policy harvesting the corps of liberating the Yuan price.