Trade War Risks Prompt More Chinese Stimulus

Up until now, it has been unclear whether the failure to reach a trade agreement between the US and China was attributed to China’s lack of experience when it comes to trade matters.

Sources close to officials have said that the US has always had an edge on trade issues, at least between the US and Chinese delegates, and that the Chinese have limited experience in dealing with trade disputes.

But still, there has not been an official reason for the failure of the deal.

In a new statement on the White House lawn, however, and regardless of Chinese officials’ lack of experience in international law, Trump stated that it, was not, in fact, the Chinese who are holding back the deal. The president affirmed:

“China is a major competitor, and right now China wants to make a deal very badly. It is me right now that is holding up the deal. And we’re going to either do a great deal with China or we’re not going to do a deal”

Trump’s comments took away some of the positive US-Mexico vibes from the markets. He reiterated that a deal needs to happen, but only as long as China respects the US’ earlier demands.

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The Chinese government moved into easing mode back in July last year. In fact, it has done so every single month of the second half of 2018 in order to provide stimulus.

Despite credit improving, flows have remained at low levels. Indeed, at better numbers than last year, but still way below average. This seems to be worrisome for Chinese officials as they are concerned about how the country’s GDP is going to pan out.

An escalation in the trade dispute and fears of renewed tariffs has forced the local government to take stimulus measures once again. This has left more room for infrastructure by extending more credit. This time, some type of special bonds are going to be used as funding for infrastructure.

In addition, the move came after PBOC was prompted to inject more money into the banking system. This was after the China Banking and Insurance Regulatory Commission (CBIRC) took control of Baoshang Bank, a Mongolia-based bank. And, of course, it was a move to calm investors amid fears of further takeovers.

This was a fairly good session for Chinese equities because of the stimulus measures with momentum easing off following an increase in Chinese CPI inflation.

CPI inflation isn’t a major concern for the Chinese at the moment as it is a little higher than in other countries. That being said, PPI inflation – a gauge of industrial profitability – will be watched more closely as it rose a mere 0.6% year on year (YoY).

This last set of data saw inflation rising to a 15-month high but the appreciation was owed primarily to pork prices. In fact, taking food and energy out of the equation, core CPI inflation rose only 1.6%.

USDCNH

Regardless of the positive CPI figures, the Chinese Yuan seems to be weakening. After the wave 4 correction completed at 6.8978, and following an upside bias marked by the ascending trendline (grey color), the probabilities that this turns out as an impulse wave 5 have increased.

In the short-term, the pair looks bullish with invalidation at 6.9173 support and below the ascending trendline. If the downslide begins, prices could break below wave 4 at 6.8978 for a deeper correction.

The 50% RSI just rejected bulls, but this may not last long. All the while, the MACD EMA crosses above the slow line.

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