China initiating a currency war with the United States clearly indicates that, so far, there is no real hope that countries can reach a compromise on mutual trade.
On Monday, China sharply weakened its national currency against the US dollar. This appeared to be a surprise for Donald Trump and plunged global financial markets into a state of shock. On this wave, stock indices collapsed not only in Asia but also in Europe and the USA. Such a fall has not been noted since the end of last year when the Fed once again raised its key interest rate by 0.25%.
The wave of sales affected not only stock markets but also commodity and raw material assets. At the same time, protective financial instruments began to be in demand, particularly government bonds of economically developed countries, especially the United States. There are also gold and safe-haven currencies, which traditionally include the Japanese yen and the Swiss franc. The American dollar was under serious pressure and interestingly, in relation to the single currency. All of these happened against the background of the publication of strong business activity index (PMI) in the services sector and weak business activity index in the non-manufacturing sector (PMI) from the US ISM.
Today, the decline in the Asia-Pacific region continues while futures for major US stock indexes are growing. What could be the reason?
In our opinion, the escalation of the trade war crisis between the States and the PRC can very likely lead the Fed to lower interest rates once again at the next meeting by 0.25%, if it becomes clear that the measures taken by the Chinese financial authorities are beginning to harm the American economy. Another important point to consider is that the authorities of the “Celestial” officially announced the suspension of food purchases in America and the possibility of increasing import duties on American products, which is a direct blow to the States.
Why do we think the Fed could lower rates again? It is necessary to recall here that the regulator has repeatedly mentioned that it closely monitors the dynamics of negotiations between Washington and Beijing. He made it clear more than once that this is a very important factor for the American economy and the world as a whole. Therefore, we believe that this will force the Central Bank to soften its monetary policy if the confrontation continues. In this case, we can expect the start of a cycle of depreciation of the dollar and the currency war declared by Beijing will only expand and deepen, where each of the countries will be for itself.
Forecast of the day:
The USD/CHF pair is recovering in the wake of profit-taking and rising futures for US stock indices. She can grow to 0.9800. However, if this level persists and market sentiment worsens again, we should expect a price reversal and resumption of its decline to 0.9690.
We expect a similar picture in the USD/JPY pair, which can recover to 107.25, and then turn around and rush to 104.70.
The material has been provided by InstaForex Company – www.instaforex.com