Trade disputes collapsed the Yuan and weakened the Dollar


A new round of trade conflict escalation caused a sale of risky assets and a new round of demand for safe havens. S&P500 and Dow Jones closed Friday with a decline of around 2.5%, and Asian trading platforms at the start of Monday picked up on this mood. Nikkei225 is losing 2.1%, while Shanghai's ChinaA50 is falling by 2.0%.

The offshore yuan also picked up momentum. The USDCNH is updating 11-year highs above 7.166, moving quickly from a mild strengthening to a sharp growth. At the same time, the U.S. dollar is also declining against its main rivals. The dollar index fell by 0.7% to 97.56 in response to Powell's words at Jackson Hole.

On Friday, the head of the Fed indicated that the Central Bank is ready to soften the policy if conditions require it, but it depends not so much on the economy as on trade negotiations. This is a very important message for market participants, which allows them to judge the priorities of CB's policy. Tariff wars promise to turn into a short-term surge of inflation, while the U.S. is already witnessing an acceleration in the rate of price growth while the economy slows down.

The Federal Reserve's tolerance for the last surge in inflation and the expected further acceleration of inflation is holding markets back. Without Powell's softness, Friday's collapse could have been even deeper as the dollar's decline has softened it.

But that brings us to another, more important problem. The central banks of the two largest economies, voluntarily or not, are involved in currency wars because they are forced to support the economy through policy easing, with side effects such as the weakening of the national currency.

Needless to say, the two per cent drop in markets is hardly a panic, as we have seen a similar amplitude many times in a month. However, if the decline of the dollar and the renminbi is stable, it can trigger a real panic in the financial markets.

In case of stronger demand for safety, investors may strengthen dollar purchases, despite the expected policy easing from the Fed. The history of the last 1 ½ years clearly shows that the escalation of trade conflicts causes the strengthening of the American currency, despite the easing of the Fed's policy.

FxPro UK Limited is authorised and regulated by the Financial Services Authority, registration number 509956. CFDs are leveraged products that incur a high level of risk and it is possible to lose all your capital invested. Please ensure that you understand the risks involved and seek independent advice if necessary.

Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. FxPro does not take into account your personal investment objectives or financial situation. FxPro makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any employee of FxPro, a third party or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of FxPro. This communication must not be reproduced or further distributed without the prior permission of FxPro. Risk Warning: CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary. FxPro Financial Services Ltd is authorised and regulated by the CySEC (licence no. 078/07) and FxPro UK Limited is authorised and regulated by the Financial Services Authority, Number 509956.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD flirts with 34-month lows amid after poor German figures, amid coronavirus fears

EUR/USD is trading just above 1.0820, the lowest since 2017, as the coronavirus outbreak is taking its economic toll on Apple among others. The German ZEW Economic Sentiment missed expectations with 8.7 points.

EUR/USD News

GBP/USD remains depressed below 1.30 as UK jobs figures miss expectations

GBP/USD is trading below 1.30 after UK wages decelerated to 2.9% yearly in December, worse than expected. Brexit concerns are also weighing and coronavirus headlines are eyed.

GBP/USD News

Forex Today: Coronavirus takes a bite from the apple, Gold gains, Bitcoin bounces

The coronavirus outbreak's economic impact is growing as Apple, the iPhone maker has issued a warning that it is unable to meet its guidance due to production and issues and closed stores in China. The tech giant's announcement has been weighing on the market mood, pushing gold and the yen higher. 

Read more

Gold: Positive beyond six-week-old falling trendline

Gold prices take the bids above $1585, +0.35%, during the pre-European trading on Tuesday. The yellow metal recently broke a downward sloping trend line stretched from January 08. Early-month top on the buyer’s radar.

Gold News

FXStreet launches Real-Time Trading Signals

FXStreet Signals offers access to explanatory live webinars, real-time notifications when signals are triggered and exclusive membership to the company’s Telegram group, where users get direct guidance by our analysts and get room to discuss and interact.

More info

Forex Majors

Cryptocurrencies

Signatures