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Rabobank: There Is One Key Thing To Watch Today: The Yuan

Courtesy of ZeroHedge View original post here.

Submitted by Michael Every of Rabobank

Tunnels & Trolls

There is one key thing to watch today. That is USD/CNH, which is vitally important as the exchange rate of the world’s two largest economies, and as a key trigger for risk off panic when CNH starts to fall. Most of the time, of course, watching this cross or describing its daily movements is like watching paint dry, or describing pain drying. As I repeatedly state, it is not a real market in the traditional sense (though what is nowadays?). Rather, it is a political virtue-signalling device. For that reason, pay very close attention to it as US-China relations tank. Indeed, it seems both sides are doing their level best to undermine relations with a series of tunnels that destroy the foundations of trust and by trolling the other.

From Beijing’s side, the irascible Global Times, among other outfits, has continued to suggest that Covid-19 did not originate in China and that the US army might be responsible instead. On Friday, the Chinese embassy in Paris even released a Lego-style animation mocking the US and its virus response, which was not what one would call traditional diplomacy. Neither was the Global Times editor calling Australia gum stuck to the bottom of a shoe last week. China does not return from holiday until Wednesday, so this is all just a warm-up.

From the side of the land of the brave and the home of Tunnels & Trolls there has been equal tunnelling and trolling. US President Trump, speaking on the virus on TV yesterday, stated: “We will be giving a very strong report on what we think happened, and I think it will be conclusive…Personally, I think [China] made a very horrible mistake. They tried to cover it, they tried to put it out. Trump also stated that if China does not purchase US goods in line with the “phase one trade deal” that he will terminate it. His likely Democratic presidential opponent is meanwhile attacking Trump for having prioritised the trade deal over a tougher Covid response – indeed, Pew polling in the US shows anti-China rhetoric sells well across party lines. Trump is already pivoting, using tweets to conflate his regular attacks on the press with ones on China, claiming some US news channels are fake and “going out of their way to say GREAT things about China. They are Chinese puppets who want to do business there. They use USA airwaves to help China. The Enemy of the People!

Secretary of State Pompeo has gone even further, claiming “enormous evidence” that Covid-19 came from Wuhan and that “these are not the first times we’ve had a world exposed to viruses as a result of failures in a Chinese lab.” He’s also tweeted even more incendiary attacks on the Chinese Communist Party itself, and on TV stated “China behaved like authoritarian regimes do, attempted to conceal and hide and confuse,” and that it continued to block US and WHO expert access to samples of the virus needed for study. There are also news reports circulating that claim US officials believe (meaning ‘want the press to report that’) China deliberately covered up Covid-19 while it secured access to the majority of world Personal Protective Equipment (PPE). Further anti-China briefings from US officials can no doubt be expected ahead, with another scheduled for today.

I have repeated several times recently that this backdrop is not conducive for any realistic hopes of a US-China trade deal. Quite the opposite. At this stage the only question is how far relations deteriorate and how much damage is done. USD/CNH was flat this morning at around 7.13, with the market either seeing tacit intervention or a lack of any participant willing to be seen taking a side in this epic trolling session.

It is unlikely that will remain the case, however, and the key thresholds to watch are 7.1545, which was the high seen this year so far, and then 7.1940, which was the high seen before the “phase one trade deal” was signed. Break through the latter and we are in a dark and scary tunnel.

Of course, the timing of all this could not really be worse given we are already seeing mounting evidence that when you remove a virus lockdown things don’t improve much:

  • A consumer survey in China showed 51% of respondents planned to spend less and save more ahead, with only 9% increasing spending; other estimates are that while some 90% of firms are open again, a huge share are operating at a much-reduced capacity. Is it any surprise that we are also seeing manufacturing PMIs in Indonesia, India, Taiwan, Japan, and South Korea at the lowest since 2009, or ever?
  • In the UK, a survey shows that nearly 3 in 4 people are worried about lockdowns being rolled back and are unlikely to return to normal consumer behaviour. There is now chatter that the government might have to extend help to commercial landlords whose tenants can’t pay the rent. Hey, just stick it on the tab, right?
  • In the US, Georgia has reopened and yet has been “a disaster” for some retailers, according to a story. Admittedly the firm featured most heavily--one which lets you throw axes at targets--might not be high up on the list of consumer priorities post-lockdown, although some might say it is much needed. However, the owner reports that he did not even see 10% of his usual client numbers – he got just two all weekend.
  • Only Australia seems to be bucking the trend with a big beat in building approvals (albeit -4.0% m/m vs. -15% expected)…except held-wanted ads dropped 53.1% m/m in April so it’s unclear who is going to be earning enough to buy the houses that are being built, especially with the borders closed too. Moreover, a Labor Party Senator for NSW just wrote an editorial which asks “Do we want migrants to return in the same numbers? The answer is no.” This argues “As a result of COVID-19, Australia will soon have an opportunity to do something we have never done before: restart a migration program. When we do, we must understand that migration is a key economic policy lever that can help or harm Australian workers during the economic recovery and beyond. We must make sure that Australians get a fair go and a first go at jobs. Our post-COVID-19 economic recovery must ensure that Australia shifts away from its increasing reliance on a cheap supply of overseas, temporary labour that undercuts wages for Australian workers and takes jobs Australians could do.” Another political taboo bites the dust, and another economy has to work out where it goes next if not down the same old rabbit-hole. As such, AUD goes down too: more so as despite the yield pick-up over USD it is still a good proxy for CNY or CNH.

In short, we are all still in a long, dark tunnel – and we don’t know if the light we see ahead is a way out or just the reflection of a monster’s eye

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