US-China trade tensions front and centre

US-China trade tensions front and centre
Philip Wee09 May 2019
    Photo credit: AFP Photo

    FX: US-China trade tensions front and centre

    The volatility so far induced by threats and counter-threats of trade restriction measures by US and China is still relatively muted, considering the stakes involved. If talks break down and most exports from China to the US face 25% tariff from this Friday onward, risks of a financial market collapse, extreme risk aversion, and sharp slowdown in global growth will spike. Even if last moment developments lead to a postponement of escalation, the ill-will generated by this week’s developments will not go away, in our view.

    The barometer for US-China trade tensions – the offshore CNH rate – has remained weak around 6.80 against the US dollar. US President Trump’s tariff threat is no longer viewed as a negotiating strategy for the US-China trade talks on Thursday-Friday. China has threatened retaliation if the 10% tariff rate on USD200bn worth of Chinese good is increased to 25% this Friday. This would reverse the fall in USD/CNH from 6.98 to 6.70 that was premised on hopes for a trade deal that could lower tariffs. According to our calculations, the yuan would depreciate to 7.20 and 8.10 respectively on a 25% tariff rate on USD200bn and the remaining USD325bn worth of Chinese goods.

    In Singapore, the central bank’s decision to increase transparency in forex operations had had no immediate impact on the Sing dollar. The Monetary Authority of Singapore has scheduled to release its net purchases of foreign exchange data for 2H19 around mid-2020. Renewed US-China trade tensions will be the main factor keeping the US dollar firm around 1.3620 against the SGD with upside risks. The latest announcement will, nonetheless, provide investors the confidence that Singapore has the firepower to address the recent increase in market volatility. Singapore’s official foreign reserves are strong around 82% of GDP, well above the 65% targeted officially. Currently located near the stronger limit of policy band, there is room for the SGD to respond to any shocks in global markets. In USD/SGD terms, the implied mid-point of the policy band is estimated around 1.3840 this morning.

    Philip Wee

    FX Strategist - G3 & Asia


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