A new week and the last for August. For those in the UK, hopefully, you enjoyed an unseasonably warm bank holiday. Last week ended with a bang, President Trump’s various Tweets sending stocks and the USD falling at a rapid rate of knots.

Did the G7 meeting over the weekend spring any surprises? Maybe some mutual love between China and the US? Let’s see.

The FX markets in Asia opened nervously and almost immediately saw a sharp move lower in ‘risk-off’ trades. 

USDJPY dropped from 105.40 to 104.45, AUDUSD from 0.6740 to 0.6690 and XAU leaped to 1555 from 1525. Asian equities all followed on from Wall Street’s moves lower, the Nikkei ultimately closing lower by over 2%. 

However, without any further negative headlines, FX began to undo much of the earlier moves with USDJPY moving back to 105.20 and AUDUSD to 0.6740. 

The market then appears to have been caught short at lower levels and the slow grind higher continues into the European session. Then out of nowhere, we get a Trump Tweet from G7 essentially claiming that China has indicated they want to return to the negotiating table and that the US was happy to do so. Now the squeeze is on with US equity futures surging higher, the DJ futures up over 200 points at one point. 

EURUSD drops to 1.1107, USDJPY rallies to 106.40 and AUDUSD pushes to 0.6770. XAU falls back as low $1,525. Then there is a denial from China that they had ever made such a claim, but aside from a brief dip in USDJPY, the markets are keen to focus on the potentially positive news. 

Crypto has remained stable to start out the week. BTC had one brief pop to $10,700 but slips back to spend most of the day around $10,300. ETH follows a similar path, squeezing to $194 before slipping back to $189. Once again, too much else going on in traditional markets for the digital asset world to get a whole lot of focus. 

As the day progresses stocks continue to edge back higher with the DJ eventually closing up 269 points. EURUSD ends around 1.1100 and USDJPY at 106.10. XAU ends the day at 1527. Just when we thought the world was ending, apparently it’s not. Or at least not today! 

With the ongoing US-China trade war, I thought I’d add some historical perspective to the USDCNH rate (Offshore Yuan). As you have heard many times over the past few weeks we’ve seen the Yuan fix against the USD over the 7.0000 level. 

But why is that important and why is it happening? If you look at this daily chart of USDCNH, you will notice that going back to 2011, the exchange rate has remained between 6.0000 and 7.0000, the US has refrained from calling China a ‘currency manipulator’ but it’s fair to say they do ‘manage’ the exchange rate within a range. 

Since the trade war got pretty heated, China has allowed its currency to weaken beyond the 7.0000 level, hitting a high of 7.1832. A weakened currency makes exports more attractive and helps insulate Chinese exporters against the US tariffs.

This obviously is angering the Trump administration and has led to threats of US intervention. Keep a close eye on this exchange rate as further weakening could really put pressure on the US economy. 

Keep up-to-date with market commentary and analysis. Trade with a broker you can rely on, visit tiomarkets.com for more information.

David Hannigan

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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