China’s FX slumps against USD – More financial turbulence to come?

Follow on from last Friday’s scramble to haven assets (covered here), risky assets are continuing to weaken on Monday.

The key chart to watch is the USD-Chinese Renminbi FX rate chart. The past two sessions saw the rate breach the all-important 7.00 level for the first time in a decade (see below). The last time China allowed its currency to devalue deeply – Aug 2015 – led to a sharp decline in global equity markets.

CNY’s latest devaluation happened after the US president increased tariffs on Chinese imports into the US. The Trump administration hiked an additional 10% tariffs on $300 billion worth of Chinese imported goods last week.

One way to relieve the downside of slowing exports is to make its currency more competitive, ie, a weaker currency.

The latest fall below 7.00 could lead to a wave of competitive devaluation across the region as other Asian countries try to match China’s devaluation. This will increase financial turbulence across the region as investors try to work out which other assets will be hit.

For example, the Hong Kong stock market is already reacting with dismay, gapping down sharply into its recent pivot lows. The HK hang Seng Index, at the time of writing, broke the key support at 27,000 to trade around 26,300. The next support is at 25,000 (see below).

With gold is trading at its multi-year highs – safe haven bidding – I expect European equity markets to come under selling pressure in the near term until some of the bearish factors (tariffs, slowing headline macro data etc) are removed.

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