Yuan Slide Could Kick up Currency War as World Awaits Trump RetaliationAug6

Daily Intelligence Briefing

Tuesday, August 6, 2019

FX

A U.S.-China Currency War Would Do Some Serious Damage

Although Trump’s economic adviser Larry Kudlow so far has ruled out any currency intervention by the U.S. Treasury to weaken the dollar, it would be a brave trader who took this at face value.

Perhaps the people to feel most sorry for in this arm-wrestling between the world’s two most powerful countries are the Europeans and the Japanese, who might end up as collateral damage. Both the U.S. Treasury and the Chinese authorities have the capacity to ramp up or deescalate their currency hostilities. After years of ultra-expansive monetary policy, Japan and Europe have almost no room left for their own defensive maneuvers.

The ECB has already fired its biggest policy gun by signalling a move toward even deeper negative rates after the summer and the possible restart of net bond purchases. It is out of ammunition. In the meantime, a weaker yuan is by itself very bad news for Europe. An unwanted rise in the euro as China and the U.S. duke it out to weaken their own currencies would be a disaster for Europe’s export-dependent manufacturers and could plunge the continent into recession.

Japan, the world’s third-largest economy, is similarly at the mercy of its bigger rivals. The yen has strengthened recently against the dollar to early 2018 levels and is back to 2016 valuations versus the yuan. That puts huge pressure on Shinzo Abe’s government in its efforts to resuscitate the economy.

Read the full article from Bloomberg +

FX

China lets yuan weaken and stops buying U.S. crops, escalating trade war

The U.S. Treasury Department announced late on Monday that it had determined for the first time since 1994 that China was manipulating its currency, knocking the U.S. dollar .DXY sharply lower and sending gold prices XAU= to a six-year high. The designation by U.S. Treasury Secretary Steven Mnuchin starts a formal process of bilateral negotiations between the world’s two largest economies, and fulfills a promise made by U.S. President Donald Trump on his first day in office.

The IMF had no immediate comment. Last month, the global lender said China’s yuan was broadly in line with economic fundamentals, while the U.S. dollar was overvalued by 6% to 12%.

The Treasury statement, made after the stock trading session ended, sent S&P 500 futures EScv1 down more than 1%, suggesting investors expect Wall Street to open on Tuesday with additional losses following Monday’s drop of 3% on the S&P 500.

The U.S. action came after China let its currency weaken 1.4%, sending it past the key 7-per-dollar level for the first time in more than a decade. Beijing also halted U.S. agricultural purchases, inflaming a trade war that has roiled financial markets, disrupted supply chains and slowed global growth.

Read the full article from Reuters +

FX

Currency intervention: Here’s how the U.S. could move to weaken the dollar

While still seen as a long shot — Goldman Sachs described it last week as a “low but rising risk” — a growing number of analysts are warning that President Donald Trump’s longstanding frustration with the U.S. dollar’s relative strength versus major rivals could eventually lead to U.S. government to intervene in the currency market in an effort to weaken the greenback.

Last week, Bloomberg News reported that Trump has asked aides to look for ways to weaken the dollar and asked about the currency in job interviews with the candidates he’s selected for seats on the Federal Reserve’s board.

Intervention occurs when a central bank buys or sells its own currency in an effort to influence the exchange rate. A government might take action to halt a precipitous slide or a sharp runup in its currency following a shock. It could also act in concert with or on behalf of other countries in an effort to stabilize a particular currency. In fact, the last time the U.S. intervened in the currency market was in March 2011, as part of a coordinated effort by the Group of Seven nations to arrest a surge in the Japanese yen following a devastating earthquake and tsunami.

Utilizing their massive reserves, central banks can get their way, at least in the short term. A credible threat — explicit or implied — to intervene around a certain level can often hold sway, particularly if underlying fundamentals and other factors stand in the central bank’s favor.

Read the full article from MarketWatch +

FX

US declares China a currency manipulator, says it’s using yuan to gain ‘unfair advantage’ in trade

The U.S. Treasury Department on Monday designated China as currency manipulator, a historic move that no White House had exercised since the Clinton administration.

“Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator,” the Treasury Department said in a release. “As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”

“In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department added. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain unfair competitive advantage in international trade.” The yuan fell to 7 against the dollar earlier in the session for the first time since 2008.

Even before the formal designation, President Donald Trump took to Twitter to voice his opinion, accusing Beijing of manipulating its currency as the trade war between the world’s largest economies intensified.

Read the full article from CNBC +

SHORT

Airlines

LONG

CRISPR

LONG

Robotics & Automation

LONG

Solar

LONG

Vietnam

SHORT

Autos

LONG

Electric Utilities

LONG

Silver

SHORT

U.S. Pharmaceuticals

LONG

3D Printing

US Composite PMI Revised Higher: Markit

The IHS Markit Composite PMI was revised higher to 52.6 in July 2019 from a preliminary estimate of 51.6 in the previous month and compared to June’s final reading of 51.5. Services activity output increased at a faster pace (PMI at 53.0 from 51.5) while manufacturing expansion was the weakest since September 2009 (PMI at 50.4 from 50.6).

Click here to access the data +

US Services PMI Revised Higher: Markit

The IHS Markit US Services PMI increased to 53 in July of 2019 from 51.5 in the previous month and above preliminary estimates of 52.2. It is the fastest pace of expansion in services since April.

Click here to access the data +

US Non Manufacturing Sector Growth at 3-Year Low

The ISM Non-Manufacturing PMI for the United States dropped to 53.7 in July 2019 from 55.1 in the previous month and below market expectations of 55.5. The latest reading pointed to the weakest pace of expansion in the non-manufacturing sector since August 2016.

Click here to access the data +

US 10-Year Yield Inversion Deepens

The 10-year US Treasury note yield fell as much as 7bps to 1.7752% on Monday morning, its lowest level since October of 2016, on growing demand for safe haven assets after China allowed its currency to drop to its weakest level since 2008 in retaliation to last week’s President Donald Trump decision to slap an additional 10% tariff on the remaining Chinese imports. At the same time, the yield on the 3-month Treasury note declined 2.32bps to 2.025%.

Click here to access the data +

Gold Rallies to Over 6-Year High

Gold prices rose to the highest since May 2013 on Monday, extending gains from the previous session, amid a deterioration in US-china trade relations while persistent worries regarding a global economic slowdown increased investors’ appetite for safe-haven assets. Prices were also supported by a weaker dollar and gold purchases by the central banks. Gold prices rose as much as 1.7% to $1468.66 an ounce around 12:30 PM New York time.

Click here to access the data +

UK 10-Year Gilt Yield Slides to Record Low

Britain’s 10-year gilt yield fell below 0.5% on Monday morning, its lowest level on record, as trade tensions between Washington and Beijing mount after China let the yuan fell to its lowest level in over a decade, while political and Brexit uncertainty increased on the back of a reduced Boris Johnson’s majority in parliament.

Click here to access the data +

Markets

FX

A U.S.-China Currency War Would Do Some Serious Damage

Although Trump’s economic adviser Larry Kudlow so far has ruled out any currency intervention by the U.S. Treasury to weaken the dollar, it would be a brave trader who took this at face value.

Perhaps the people to feel most sorry for in this arm-wrestling between the world’s two most powerful countries are the Europeans and the Japanese, who might end up as collateral damage. Both the U.S. Treasury and the Chinese authorities have the capacity to ramp up or deescalate their currency hostilities. After years of ultra-expansive monetary policy, Japan and Europe have almost no room left for their own defensive maneuvers.

The ECB has already fired its biggest policy gun by signalling a move toward even deeper negative rates after the summer and the possible restart of net bond purchases. It is out of ammunition. In the meantime, a weaker yuan is by itself very bad news for Europe. An unwanted rise in the euro as China and the U.S. duke it out to weaken their own currencies would be a disaster for Europe’s export-dependent manufacturers and could plunge the continent into recession.

Japan, the world’s third-largest economy, is similarly at the mercy of its bigger rivals. The yen has strengthened recently against the dollar to early 2018 levels and is back to 2016 valuations versus the yuan. That puts huge pressure on Shinzo Abe’s government in its efforts to resuscitate the economy.

Read the full article from Bloomberg +

FX

China lets yuan weaken and stops buying U.S. crops, escalating trade war

The U.S. Treasury Department announced late on Monday that it had determined for the first time since 1994 that China was manipulating its currency, knocking the U.S. dollar .DXY sharply lower and sending gold prices XAU= to a six-year high. The designation by U.S. Treasury Secretary Steven Mnuchin starts a formal process of bilateral negotiations between the world’s two largest economies, and fulfills a promise made by U.S. President Donald Trump on his first day in office.

The IMF had no immediate comment. Last month, the global lender said China’s yuan was broadly in line with economic fundamentals, while the U.S. dollar was overvalued by 6% to 12%.

The Treasury statement, made after the stock trading session ended, sent S&P 500 futures EScv1 down more than 1%, suggesting investors expect Wall Street to open on Tuesday with additional losses following Monday’s drop of 3% on the S&P 500.

The U.S. action came after China let its currency weaken 1.4%, sending it past the key 7-per-dollar level for the first time in more than a decade. Beijing also halted U.S. agricultural purchases, inflaming a trade war that has roiled financial markets, disrupted supply chains and slowed global growth.

Read the full article from Reuters +

FX

Currency intervention: Here’s how the U.S. could move to weaken the dollar

While still seen as a long shot — Goldman Sachs described it last week as a “low but rising risk” — a growing number of analysts are warning that President Donald Trump’s longstanding frustration with the U.S. dollar’s relative strength versus major rivals could eventually lead to U.S. government to intervene in the currency market in an effort to weaken the greenback.

Last week, Bloomberg News reported that Trump has asked aides to look for ways to weaken the dollar and asked about the currency in job interviews with the candidates he’s selected for seats on the Federal Reserve’s board.

Intervention occurs when a central bank buys or sells its own currency in an effort to influence the exchange rate. A government might take action to halt a precipitous slide or a sharp runup in its currency following a shock. It could also act in concert with or on behalf of other countries in an effort to stabilize a particular currency. In fact, the last time the U.S. intervened in the currency market was in March 2011, as part of a coordinated effort by the Group of Seven nations to arrest a surge in the Japanese yen following a devastating earthquake and tsunami.

Utilizing their massive reserves, central banks can get their way, at least in the short term. A credible threat — explicit or implied — to intervene around a certain level can often hold sway, particularly if underlying fundamentals and other factors stand in the central bank’s favor.

Read the full article from MarketWatch +

FX

US declares China a currency manipulator, says it’s using yuan to gain ‘unfair advantage’ in trade

The U.S. Treasury Department on Monday designated China as currency manipulator, a historic move that no White House had exercised since the Clinton administration.

“Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator,” the Treasury Department said in a release. “As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”

“In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past,” the Treasury Department added. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain unfair competitive advantage in international trade.” The yuan fell to 7 against the dollar earlier in the session for the first time since 2008.

Even before the formal designation, President Donald Trump took to Twitter to voice his opinion, accusing Beijing of manipulating its currency as the trade war between the world’s largest economies intensified.

Read the full article from CNBC +

Economics & Trade

Brexit

Just 3 in 10 British firms that export to the EU are prepared for a no-deal Brexit

Less than a third of British companies that export to the European Union have secured crucial registration which they need to continue trading with the EU in a no-deal Brexit, government figures have shown.

The Treasury has published figures showing that just 27% of businesses that export to the EU have an Economic Operator Registration and Identification (EORI) number, which they need to trade with the EU in a no-deal exit. The figures — obtained from the government by the Liberal Democrats — also show that if exporters to EU apply for EORI numbers at the current rate, all businesses won’t be registered until at least the beginning of 2021.

Chuka Umunna, the anti-Brexit party’s Treasury spokesperson, said the figures show that “an overwhelming majority of UK exporters to the EU are unprepared for a ‘no deal’ Brexit and will not be in a position to deal with the mountain of red tape and bureaucracy it will burden them with on 31 October.”

It also reported last month that a number of measures that were put in place to mitigate some effects of a no-deal Brexit in March had not been rolled over to cover a no-deal exit in October.

Read the full article from Business Insider +

Finance

Payments

Cashless payment booms in China and India spell end of the ATM

The total number of ATMs around the world fell for the first time in 2018, slipping 1% to about 3.24 million units at the end of the year, according to Retail Banking Research, a British research company specializing in banking technology, cards and payments.

In China, the world’s largest market, the number of ATMs fell 6.8% from a year earlier to 690,000. The U.S., the second-largest ATM market, saw the total drop 0.9% to 433,500.

The total number of branches in the in the 36-member Organization for Economic Cooperation and Development, a grouping of developed economies, fell 2.8% in 2017 to 268,900, according to data from the International Monetary Fund.

Driving the decline in brick-and-mortar financial services is the fall in cash transactions and growing use of cashless payments, including credit cards, contactless payments, cryptocurrencies and fintech-based services. Smartphone payment services that use QR code technology have spread rapidly in the world’s second-largest economy, leading Chinese, especially young people, to carry less cash.

Read the full article from Nikkei Asian Review +

Labor, Education & Demographics

Wages

What Apocalypse? Retail Worker Pay Hits 15-Year High

Despite an industry shakeout that’s been dubbed the retail apocalypse, store workers who have hung in there are seeing better pay than a generation ago, even with inflation. Minimum wage increases by states and across major chains, like Walmart Inc. and Target Corp., coupled with a tight labor market, have jump-started the income gains. Average hourly earnings for 13.4 million non-supervisory retail workers surged 5.1% last year for the biggest advance since 1981, according to the U.S. Bureau of Labor Statistics. And they’ve kept rising, hitting $16.65 an hour in July. When adjusted for inflation, that’s the highest level since December 2003.

But it’s important to remember that while retail workers are getting paid more, there are fewer of them. The industry’s payrolls peaked in January 2017, with department stores and clothing chains hit especially hard since then. A mix of online competition, too much debt and mismanagement have recently wiped out chains such as Toys “R” Us, Bon-Ton, Payless and Gymboree. Meanwhile, operating chains, like Sears, J.C. Penney and Gap, continue to shutter underperforming stores and cut jobs.

And while retail associates have made recent gains, they still earn much less than hourly workers in many other sectors. They are now making 29% less than the average for all non-supervisory employees, just a marginal improvement from 30% a decade ago. Inflation-adjusted retail wages also still have a ways to go to surpass their levels in the 1970s, even as pay for hourly workers in general last year finally passed their inflation-adjusted 1973 peak.

Read the full article from Bloomberg +

Services

Video Games

XRDC: 59% of AR/VR developers are working on games

Games continue to make up the largest chunk of VR, AR, and XR development in a year where the industry has seen releases of two major new headsets: the Oculus Quest, and the Valve Index. In a survey of over 900 professionals working in AR, VR, and XR development, XRDC determined that 59% of them were working on video games. Non-game entertainment projects had the second-largest share of projects, with 38%.

By platform, 29% of developers said they were working on projects for the Oculus Rift, 24% for the Quest, and 24% for the HTC Vive. The HTC Vive has had the largest share of projects for the past three years until now, with the Rift surpassing it and the Quest tying it. 23% also said they were developing for Android phones and tablets using ARCore. 52% of developers said they were designing their project specifically for AR/VR, and thus were not concerned about adapting the project for 2D platforms.

Looking at funding, a trend from previous years continued as 41% of developers reported their projects were being supported by existing company funds. Outside investment still seemed to be a less viable funding option, with 23% reporting using personal funds, and 27% saying the funding came from clients.

Read the full article from Games Industry +

Manufacturing & Logistics

Firearms

Gun industry’s woes are accelerating on Trump’s watch

Even as U.S. stocks trade near all-time highs, one industry has taken it on the chin in the Trump era: gun manufacturers. The National Rifle Association, the powerful lobbying organization that represents the gun industry, has serious problems too. Fifteen of the NRA’s most reliable House Republicans were voted out last November, and Democrats, now in the majority, have passed a variety of gun control legislation.

The NRA has been unable to halt, much less reverse, the corporate, consumer, demographic and investment trends that are slowly and steadily moving against them, and have been for years. For all the hand-wringing about how Washington won’t act on guns—and it certainly won’t now—it’s clear that the marketplace is doing so, whether the gun lobby likes it or not.

But Republicans still control the Senate and White House of course, so Nancy Pelosi can pass all the bills she wants, and nothing will come of it. All Republicans have to do is hang onto either the Senate or White House in the 2020 election (and they could hang on to both) and the NRA’s agenda is safe well into the next decade.

Read the full article from MarketWatch +