The CNY Fix is the number one game in town right now and will continue to dictate the pace of play for risk assets over the near-term. Nothing else matters at this stage.
Forget the VIX. The USD/CNH is the market's new fear gauge, now the best barometer for investor sentiment after President Trump's threat of more tariffs on China. That's depressing at best.
Today's fix signals to investors that the Pboc is using market synergies drive the fix while trying to tame the beast by slowing the move higher. This has markets breathing a sigh of relief since it also signals an unwillingness to engage in a currency war while offering a trade truce gesture the U.S. administration.
Hopefully, this olive branch is accepted by the U.S. administration hawks.
But ...
And while the Pboc continues to deny they will weaponize the yuan they have a sturdy tool at their disposal and will not hesitate to use it as a direct tariff offset. Indeed, this is a very scary offset.
In the face of a weakening yuan and the potential for full-blown trade and currency wars, I no longer believe that the Fed or other central banks can offset the economic carnage, provided escalation policies remain in play. It matters little how cheap and plentiful money is under these downtrodden economic war conditions, firms will not take up central bank policy and borrow to invest, and for that matter, neither will investors.
Any further escalation in trade tensions—which appears likely—could push USDCNY to 7.20, and frankly, the markets seem happy to remain short CNHJPY SGDJPY and KRWJPY as trade war escalation hedges despite the omnipresent threat of U.S. FX intervention or at minimum a more explicit Fed-driven, weaker dollar policy. It's simply not the right time to fade this move.
Oil prices and the USD
The market should quickly look through OPEC verbal intervention as oil supply cuts could be offset by U.S. production. After all, we just had a shocking counter-seasonal build in U.S. inventories. Not to metnion, the Kremlin could be unwilling partners not wanting to give up any market share to the U.S.
If Trump levies the tariffs as expected, the USDCNH will trade at 7.20. So to put oil and currency markets in the proper context of a stronger USD, which will move through Asian currencies like a wrecking ball.
Sure, lower oil prices could offset the stronger USDASIA effect as the trade war escalates. But this view belies the fact that global economic data continues to struggle.
And with the weaker yuan pressuring the Asian basket of currencies lower, the stronger USD in Asia not only makes oil more expensive in local terms but when compounded by slowing growth it suggests the path for oil prices could be much lower.