Fixed Income Research & Macro Strategy (FIRMS) from 4X Global Research

  • While the United States and China have not gone as far as re-introducing or increasing tariffs on each others’ imports, the war of words between the two trading superpowers has clearly escalated with Hong Kong caught in the middle.
  • In line with our expectations the Chinese Renminbi has depreciated versus (a weaker) Dollar and in nominal effective exchange rate terms in recent weeks.
  • Precedent suggests the Renminbi’s slide to an 11-week low is not coincidental but the by-product of the PBoC’s conscious decision to modestly weaken its currency and send a clear, if subtle message to the United States that China can retaliate in more ways than one.
  • The implications of a breakdown in US-China relations and a resumption of a full-blown trade war would of course reach far beyond a possible acceleration in the pace of Renminbi depreciation.Among the 14 major economies which have so far released GDP data for Q1 only Chile recorded positive quarter-on-quarter growth.
  • For starters any sustained Renminbi weakness would likely increase the odds of other Asian currencies also depreciating versus the Dollar with hands-on central banks keen to maintain their countries’ export competitiveness, particularly at this current juncture.
  • It is no coincidence, in our view, that Asian currencies on the whole remain highly correlated with the Renminbi and have underperformed since 7th May (see Figures 3 & 4).

Asia-Pacific currencies

 

  • Moreover, the introduction of new import tariffs would, based on precedent, likely have a material and negative impact on world trade at a time when macro data suggest that global economic activity has only just started to very slowly recover from a very low base.
  • Any further headwind to global trade would likely delay any meaningful recovery in global supply and demand (see Figure 5) and cast further doubts on whether sequential global GDP growth can forge a V-shaped recovery in Q3 and Q4 2020 – the topic of our next Fixed Income Research & Macro Strategy report.

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4X Global Research is a London-based consultancy providing institutional and corporate clients with focused, actionable, independent and connected research on Emerging and G20 fixed income and FX markets and economies.

4X Global Research has a strong forecasting track record, rooted in both a qualitative and quantitative analysis of data, trends, policy decisions and global events. Its conflict-free and unbundled research services aim to give investors a unique edge in their investment decisions. Its exclusive subscription-based reports and consultancy services form the basis of a long-term strategic partnership with its clients.

Ryan Littlestone
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