US Tariffs Driving RMB Yuan South to 10 yr Lows Vs USD

US Tariffs Driving RMB Yuan South to 10 yr Lows Vs USD

US Tariffs Driving RMB Yuan South to 10 yr Lows Vs USD

$USDCNY (onshore): -0.29% to 6.868

  • $USDCNH (offshore): -0.09% to 6.879
  • Golden Week begins on 1 October

With little prospect of a restart for US-China trade talks, we expect an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade.

And, JPMorgan has adopted a new baseline that assumes a US-China endgame involving 25% US tariffs on all Chinese goods in Y 2019.

While growth forecasts for both the US and China are not  much affected, thanks in part to Chinese stimulus measures, “a weaker RMB Yuan becomes part of the new equilibrium,” JPM wrote in a note to clients.

The People’s Bank of China (PBoC) will probably pursue a looser monetary policy to shore up growth in face of the threats to trade, and likely won’t intervene much to counter resultant downward pressure on the RMB Yuan, according to JPM’s analysis.

The bank now expects the RMB Yuan to drop to 7.01 per USD by the end of December and 7.19 by September 2019, after previously projecting it at 7.02 in 12 months’ time.

China’s currency closed at 6.868 per USD in onshore trading last week.

The median forecast of analysts surveyed is for the currency to strengthen to 6.70 by the end of next year.

“Looser Chinese monetary policy ensures that the USD  will become an ever-higher yield Vs the Renminbi (RMB Yuan) for the rest of the cycle,” the JPMorgan strategists wrote.

The yield gap will favor the dollar thanks to further Fed tightening, in the team’s outlook.

A cheaper RMB Yuan will drag emerging Asian nations’ currencies lower with it, with depreciation magnitudes likely to exceed forward rates for all except the Indian Rupee and Indonesian Rupiah, the bank said.

As for cross-asset investment strategy, the Asian currency declines “are possible constraints on regional equities,” JPM analysts wrote. Base metals prices should still gain into Y 2019 thanks to reduced inventories, however.

The new baseline on the trade war also “raises medium-term questions for the world’s most-expensive equity market (US) and one of its cheapest (China),” they wrote. US earnings estimates will be under pressure due to higher costs thanks to tariff hikes. “Full tariffs could trigger 1st earnings downgrades of The Trump Era.”

For Chinese stocks, which have entered a bear market even as U.S. benchmarks climbed to record highs, the outlook depends on the country’s success in stoking consumption and sectors including technology and e-Commerce, JPMorgan strategists say. If that rotation doesn’t keep going, “China assets could retain a risk premium for some time,” they said

Have a terrific week.

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