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China has added some positive to the gloomy market environment, reporting unexpectedly strong export data despite a large-scale trade war. Imports also turned out to be better than market participants could have expected. This means that domestic demand in the country is not so weak.
The Bank of China also slightly calmed traders. The country's monetary authorities set the yuan at a more solid level than on Wednesday. The market immediately started talking about the stabilization of the course. The concern that China will continue to devalue its currency is gradually disappearing. It seems that the USD/CNY rally above the psychologically important mark of 7 was nothing more than a weapon demonstration.
USD/CNY
The health of the Chinese economy is poor due to protectionism. The risks of a recession in leading world countries have recently grown significantly. A decline in the yield curve to its lowest level since 2007 suggests that not everything is as good in the United States as Donald Trump would have liked. Note that this indicator accurately predicted a decline over the past 50 years.
The US central bank is sensitive to raising international risks. According to his senior representative Charles Evans, trade conflicts create a headwind for the US economy. With its strengthening, the Fed is obliged to take necessary measures. Earlier, Evans warned that the central bank will not limit itself with one rate cut by 25 bp in 2019. Now the official allows it to fall to zero. In the past few days, the derivatives market has increased the likelihood of three acts of monetary easing by the end of the year from 8% to 50%. The likelihood of a rate cut by 50 bp in September rose from 2% to 33%.
JPMorgan believes in lower rates and higher currencies EM
Along with the slow growth of global GDP under the influence of the trade conflict, the Fed may unnerve another fact. The central banks of New Zealand, India and Taiwan have loosened monetary policy. Not only them but this is happening all over the world.
The Federal Reserve has no other way than to soften politics. This will limit the growth of the dollar and set in motion the exchange rates of developing countries, according to JPMorgan Asset Management.
The weakness of the EM currencies is justified after the so-called "hawkish reduction" of the Fed rate and trade tension. Now, according to representatives of the bank, the most important will be to monitor the response of the United States. EM debt in local currency will be profitable for investment, as global central banks cut rates in an effort to counter the slowdown in global GDP growth.
The lion's share of respondents are confident in reducing the rate by 75 bp by the end of 2019 If this really happens, the US dollar will seriously weaken its position. The EUR/USD pair is expected to reach the lowest point in two years - $1.15 in 12 months. In the short term, a breakthrough of one of the boundaries of the consolidation range of $1.1175 –1.1245 will allow the single currency to decide on the future direction.
EUR/USD
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