China-US tensions influence currencies market

China-US tensions influence currencies market

09 August 2019

Trade war between China and the US has been reignited again and as tensions grow, currency market also is influenced. Investors turn to buy safe haven currencies like CHF or JPY and Swiss, Japanese policymakers are under pressure to act in order to stop overvaluation of their currencies.

Tensions move to currency market

Trade tensions between the US and China have been ongoing for many months with both countries putting tariffs on imported goods. Trade war has been recently yet again reignited and additionally it moved to another section – currencies market. This week the US Treasury decided to call China a currency manipulator as the People’s Bank of China let the renminbi/US dollar exchange rate significantly weaken.

Safe haven assets are on the roll

As a result safe have assets reached new heights. Commonly considered as safe haven assets are gold, Swiss franc and Japanese yen. Gold’s prices has surged by 14% since the beginning of the year. The yen holds as of now the title of the best performing currency this year, and it traded yet again higher against the US dollar – by 3%, the US dollar went down to ¥105.90 on Monday. Investors are also keen to buy Swiss francs these days, whose exchange rate against the euro is strongest in more than 2 years. China’s move to weaken its currency has raised concerns for the global economy’s forecast, which in turn make safe haven assets, including CHF, the most attractive investment nowadays. The strong demand for CHF and JPY has led to questions by analysts and experts as to whether it is not the high time for the respective central banks to intervene, as safe haven currencies are becoming too strong and overvalued. The demand for safe haven assets is here to stay, according to experts, as trade war is escalating and there are growing worries for the global economy.

Will the SNB react?

The Swiss National Bank has had before reacted to low EUR CHF exchange rate and intervene on the currencies market. Will that be the case now? Maybe it has already happened as some data from last fortnight may suggest that the SNB sold some amount of Swiss francs to stop its appreciation. If that really happened, it would be the first time the SNB has made such a move in two years. We can’t be sure however, as the SNB is not commenting on these reports and not confirming the intervention. To sell Swiss francs is not the only option the SNB have to cap its currency – the other is to cut rates in order to weaken CHF exchange rate. There is pressure for the SNB to act either way, as too strong currency is not good for economy. The expectation is for the SNB to continue intervention rather that further cut rates, as they are already in the negative with record low values.

How about Japanese policymakers?

Japanese economy has been already hit by too strong JPY, yet so far its policymakers have done nothing. They remain very cautious as for them, as the Bank of Japan has been always known as innovative and not afraid of brave moves including quantitate easing. But as yen was close to ¥105 level on Monday, many experts predict that BoJ will have to eventually intervene. The last time the BoJ made an intervention on the currency market was way back in 2011. Lack of moves by the BoJ is considered quite strange – previously falling to the ¥105 level in the exchange rate of USD/JPY would make the bank act. But maybe policymakers are waiting for some significant point like ¥100.

Other bank’s policies

When it comes to other banks’ policies, the US Federal Reserve cut interest rates in July and further cuts are predicted. The July’s cut was the first in 11 years. Whereas the European Central Bank is still wondering what to do but it gave signals that the cut of rates might be on cards in September.