China’s Yuan Is Set for Best Week Since 2005, With Fed Help
The Federal Reserve’s shift to pause mode is helping China’s currency defy a deepening slowdown across the world’s No. 2 economy.
Even after data on Thursday showed a sharp downturn in China’s factory-gate price gains, the yuan hit its strongest against the dollar since July. It’s up more than 1.5 percent so far this week — the most since July 2005 — despite the central bank having moved to boost liquidity in the financial system.
Behind the resiliency: positive mood music from U.S.-China trade talks, and, perhaps critically, a shifting Fed outlook. Minutes from its December meeting showed American policy makers could place interest rates on hold through March or longer. That built on signals from Fed Chairman Jerome Powell last Friday about increased patience on tightening.
While a strengthening currency could pose headwinds for Chinese exports, it’s a crucial aid on a host of other fronts. For one, it helps to keep a lid on capital outflow pressures — a key source of instability in the past. It deflects pressure from President Donald Trump, a longtime accuser of China manipulating its exchange rate for competitive advantage. And it gives China’s own policy makers greater flexibility to ease monetary policy if needed.
How long the reprieve lasts for the yuan, which tumbled 5.4 percent last year and was one of the worst performers in Asia, is uncertain. Powell on Thursday noted that the Fed will keep shrinking its balance sheet. The course of trade talks is unclear; Trump’s tariffs last year walloped Chinese markets. And American economic growth may yet send the Fed back into interest-rate hiking mode.
“The yuan can hold up fine” until the Fed hikes again, trade tensions resume and China “goes all-in on stimulus,” said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. “It’s a ‘when’ and not an ‘if’ for when it reverses direction again and we test new lows.”
The yuan strengthened 0.3 percent to 6.7680 per dollar on Friday as of 10:17 a.m. in Shanghai. The offshore currency also jumped 0.3 percent.
Fundamentals surrounding the Chinese economy have yet to respond to policy makers’ targeted efforts to shore up demand. Former U.S. Treasury Secretary Larry Summers has warned China is facing its toughest test in a decade. Citigroup Inc. economists say that the risk of deflation opens the door to a potential cut in the benchmark lending rate by the People’s Bank of China for the first time since 2015.
Easing is already becoming apparent in China’s financial system. After the PBOC on Friday cut banks’ reserve requirement ratios, benchmark money market rates touched the lowest level since mid-2015 this week. The yield on the nation’s 10-year sovereign notes has also dropped.
The moves could make yuan assets less appealing to foreign investors, resulting in capital outflows and depreciation. That said, the direction of causality can be fuzzy. The stabilization in the yuan itself at the end of last year might have renewed international investors’ appetite for Chinese bonds, which were among the world’s best performing in 2018. Overseas funds boosted their holdings of Chinese debt last month after net sales in November.
For now, the yuan is comfortably distant from the 7 per dollar level that market players view as a key psychological level, and some see it holding for some time.
“The yuan is supported by trade optimism and a dovish Fed” at the moment, said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore. Though Westpac doesn’t see the Fed has having finished tightening, she said the currency will settle around 6.85 to 6.95 per dollar this year.
Dollar slips on Fed chief’s ‘patient’ comments
The dollar fell versus its major peers on Friday, as investors grew increasingly confident that the U.S. Federal Reserve may hit the pause button on monetary tightening this year.
Fed Chairman Jerome Powell reiterated on Thursday the U.S. central bank has the ability to be patient on monetary policy given that inflation remains stable. Markets are now pricing in no further rate hikes by the Fed this year.
Fed Vice Chair Richard Clarida also struck a dovish tone, underscoring the central bank’s willingness to remain patient on the issue of raising rates.
“The market has almost priced in that the Fed will not be hiking rates any further. To get the dollar weaker, market now has to expect a rate cut…I don’t see that happening,” said Sim Moh Siong, currency strategist at Bank of Singapore.
Sentiment was still slightly cautious in Asian trade on a lack of concrete details from the United States and China on any progress in their trade dispute after a three-day meeting in Beijing. The two sides are more than halfway through a 90-day truce agreed by U.S. President Donald Trump and his Chinese counterpart Xi Jinping.
Traders still remain optimistic that a trade deal between the world’s largest economies will eventually materialize. U.S. Treasury Secretary Steven Mnuchin said late on Thursday that Chinese Vice Premier Liu He will “most likely” visit Washington later in January for trade talks.
Stock Market News
U.S. stocks higher at close of trade; Dow Jones Industrial Average up 0.51%
U.S. stocks were higher after the close on Thursday, as gains in the Utilities, Industrials and Telecoms sectors led shares higher.
At the close in NYSE, the Dow Jones Industrial Average added 0.51%, while the S&P 500 index climbed 0.45%, and the NASDAQ Composite index gained 0.42%.
The best performers of the session on the Dow Jones Industrial Average were Boeing Co (NYSE:BA), which rose 2.55% or 8.78 points to trade at 352.61 at the close. Meanwhile, Caterpillar Inc (NYSE:CAT) added 2.06% or 2.69 points to end at 132.96 and The Travelers Companies Inc (NYSE:TRV) was up 1.34% or 1.59 points to 120.27 in late trade.
The worst performers of the session were Pfizer Inc (NYSE:PFE), which fell 2.38% or 1.03 points to trade at 42.31 at the close. Merck & Company Inc (NYSE:MRK) declined 1.23% or 0.93 points to end at 74.48 and Microsoft Corporation (NASDAQ:MSFT) was down 0.64% or 0.67 points to 103.60.
The top performers on the S&P 500 were Constellation Brands Inc Class A (NYSE:STZ) which rose 5.96% to 159.93, General Electric Company (NYSE:GE) which was up 5.18% to settle at 8.94 and International Paper Company (NYSE:IP) which gained 4.92% to close at 44.81.
The worst performers were Macy’s Inc (NYSE:M) which was down 17.69% to 26.11 in late trade, Kohl’s Corporation (NYSE:KSS) which lost 4.81% to settle at 66.54 and L Brands Inc (NYSE:LB) which was down 4.39% to 26.99 at the close.
The top performers on the NASDAQ Composite were Luokung Technology Corp (NASDAQ:LKCO) which rose 272.71% to 56.130, Borqs Technologies Inc (NASDAQ:BRQS) which was up 55.22% to settle at 5.65 and Organogenesis Holdings Inc (NASDAQ:ORGO) which gained 80.75% to close at 148.850.
The worst performers were China SXT Pharmaceuticals Inc (NASDAQ:SXTC) which was down 35.15% to 7.7500 in late trade, Phunware Inc (NASDAQ:PHUN) which lost 28.64% to settle at 157.00 and Interlink Electronics Inc (NASDAQ:LINK) which was down 4.39% to 2.18 at the close.
Rising stocks outnumbered declining ones on the New York Stock Exchange by 1838 to 1205 and 106 ended unchanged; on the Nasdaq Stock Exchange, 1362 rose and 1254 declined, while 96 ended unchanged.
Asia stocks crawl to 5-week high, yuan makes big weekly gains
Asian stocks inched up to five-week highs on Friday, after Chairman Jerome Powell reiterated the Federal Reserve will be patient about raising interest rates and news that trade talks between Washington and Beijing are moving to higher levels.
As the Fed’s dovish stance kept a lid on the dollar, China’s yuan rose to its highest levels in more than five months and was on course for its biggest weekly gains since the 2005 revaluation in onshore trade.
European shares are expected to rise, and financial spread-betters expect Britain’s FTSE, France’s CAC , Germany’s DAX to tick up 0.1 – 0.2 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.29 percent to the highest levels since Dec. 6, while Japan’s benchmark Nikkei advanced 0.97 percent. Shanghai Composite Index initially rose 0.56 percent.
Wall Street extended its rally into a fifth straight day on Thursday in a whipsaw trading session as investors responded to mixed comments by Powell, while a warning from Macy’s pummelled retail stocks.
At the Economic Club of Washington, Powell reiterated the views of other policymakers that the Fed would be patient about interest rate hikes.
Major U.S. stock indexes also quickly recovered from brief losses after Powell said that the Fed’s balance sheet would be “substantially smaller”.
“The word ‘patient’ is used often when the Fed’s policy direction is still tightening but its next rate hike can wait for a considerable time. So risk assets now enjoy support from what we can call Powell put,” said Tomoaki Shishido, economist at Nomura Securities.
The term “Powell put” refers to the idea that Powell’s policy will protect investors from falls in share prices, much like put options, or rights to sell assets at a pre-determined price.
Investors who worry about a fall in equity prices often buy their put options for hedge.
“Similarly, Trump also softened his stance on China after sharp falls in stock prices. He has offered an olive branch to China and there’s no reason China would not want to accept it,” he said.
U.S. and Chinese officials are working on arrangements for higher-level trade talks after mid-level officials this week discussed U.S. demands that would require structural change in China to address issues such as IP theft, forced technology transfers and other non-tariff barriers.
U.S. Treasury Secretary Steven Mnuchin said Chinese Vice Premier Liu He will “most likely” visit Washington later in January for trade talks.
“For markets the upshot is that the outlook for 2019 is looking better as tensions de-escalate, creating the potential for a re-rating of risk assets as the tail risk of a near-term trade war is partially priced out,” said Jeremy Lawson, chief economist at Aberdeen Standard Investments in Edinburgh.
“This is especially the case in Asia,” he added.
Google Policy Change Forces Bitcoin Wallet to Remove Security Features
The team behind Samourai, the privacy-focused bitcoin wallet, has removed a series of key security-related features from a version of its app as a result of “extremely restrictive policies” by Google.
Having released version 0.99.04 of its app Tuesday on the digital distribution service run by Google, called Google Play, Samourai explained in a blog post that three features – stealth mode, SIM switch defense, and remote SMS commands – have been removed as a result of Google’s push to “become more of a ‘walled garden’ experience.”
A version that contains those features is available, but not through Google’s app service. Google did not respond to a request for comment.
“Walled garden” is a term synonymous with closed-platform or closed ecosystem, referring to a software system where the service provider takes on holistic control over all operations in the system including applications, content and media. However, this is not a new trend taken on by Google, but rather one that has been proliferating for years among big technology companies even outside of Google, including Facebook and Amazon.
Speaking to CoinDesk, co-founder of Samourai who goes by the pseudonym “SW” explained that the walled garden remark was in reference to a series of policy changes carried out over the last year by Google towards all Play store application developers.
“Users of Samourai might have noticed that they are no longer getting notifications on when they receive bitcoin. That’s because if you want to use notification services you have to route everything through Google services,” said SW.
The accumulation of “little things like that” according to SW is pushing Samourai developers to opt-out of more features when releasing new wallet versions to the application.
Nevertheless, SW affirmed with CoinDesk that despite these policy restrictions, users downloading Samourai through the Google Play store are still getting “maximum amounts of privacy” unmatched by other bitcoin wallet applications.
What’s more, SW is hopeful that a compromise can be drawn between Samourai and Google Play to reintroduce these features at a later date, saying:
“If [Google] reached out to us, we’ll be able to make arrangements and be able to figure out a way to keep these features. We’re happy to change code on our end to keep in compliance with them.”
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