Originally published by AxiTrader
Who's afraid of a Trump presidency?
It seems like the governments, and likely the central bankers, of Asia and Latin America are concerned they'll be labelled currency manipulators by the US Treasury under a Trump presidency.
That's natural for two reasons.
Firstly the US dollar's surge has driven the currencies of Asia and Latin America to levels not seen in years. It's driven bigger developed market currencies substantially weaker as well with USD/JPY up near 111 and the AUD/USD at 0.7330.
But there is little anyone can do about US dollar strength until the buying subsides.
And therein lies the second reason Asia and other emerging market nations are worried about the impact a Trump presidency could have. Already China, Japan, South Korea and Taiwan are on the US treasury's naughty - monitoring - list. But so too are some European nations like Germany - it's a Euro right not a Deutsche mark - and Switzerland.
It's against this backdrop that we need to view the APEC leaders statement from the weekend meeting that said (emphasis added):
We reaffirm our previous commitments on monetary and exchange rate policies. We will refrain from competitive devaluation, resist all forms of protectionism and not target our exchange rates for competitive purposes. We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.
Putting this in context it is worth noting that APEC members, almost all of them, have seen their currencies devalued in the wake of the US dollars surge as traders bet, and money flows, towards markets and sectors investors see as the prime winners under a Trump Presidency.
As a result the statement is both a signal they are not about to have a currency war against the US (a stronger US dollar dents US industrial competitiveness) or within APEC.
Clearly APEC members are trying to keep the US Treasury at bay and deflect any criticism that may flow their way as “currency manipulators” under president Trump when he takes office.
But the US treasury criteria is more than that - as Germany's inclusion on the list highlights. They have no effective control over the Euro but do have a persistent trade surplus.
So the statement also tacitly signals that APEC members can’t do much about the recent moves driving the yuan, ringgit, Aussie dollar, Chilean peso and the currencies of many other APEC nations because this is all about the US dollar.
Indeed the Malaysian central bank, Negara, was intervening in the ringgit market on Friday to try to stem the tide of US dollar buying. It was not drawing a line in the sand but rather adding liquidity and a bit of two-way flow.
Bank Negara Assistant Governor Adnan Zaylani Mohamad Zahid, told a closed-door meeting of the media Friday, reported here by the WSJ, that "usually we step in by market intervention and market intervention provides liquidity, and we are doing that right now".
There is little more that Negara, or any other Asian central bank - including the Bank of Japan but perhaps not the PBoC - can do against the strength of capital flows out of the region when the market just want's to buy dollars.
That's because emerging markets across the region, around the world really, have been one of the few sources of real return in a world dominated by low growth and low rates. That saw capital flow in drips over recent years but it's now trying to leave in a wave, a flood would be too much of a stretch, and central banks are trying to cope with and stem that flow.
The question is whether the US treasury under Donald Trump will see it that way.
As for reassurance yes the statement suggests we are not going to get beggar thy neighbour policies within APEC. But the fact that the US is a signatory to the statement with president Obama at the meeting won’t assuage fears that president trump could still act punitively against nations – or industries – he feels are hurting American jobs and industry.
So Asia has to wait until the US dollar stabilise, and perhaps turns, before investors walk back to the region.
Until then there is little regional governments or central banks can do.
Here's the currency levels at 9.18 Beijing/Singapore time Monday:
And, Asian Market Chart of the Day - The Chinese Yuan is finally approaching resistance.
The PBOC has set the reference rate for the CNY this morning at 6.8995 against Friday's close at 6.8880. That weakness has been in keeping with the still strong move in the US dollar that has kept the yen and Aussie, along with other currencies across the region under mild pressure.
As I've highlighted above all of Asia, all of forex really, now waits to see how far the US dollar can run before the inevitable retracement. The US dollar is extended against a number of currencies and in US Dollar Index terms and that includes the yuan.
The question now is whether the top of this USD/CNY channel, which comes in around 6.9250/60 could be a place for the Yuan's sell off to pause.
Have a great day's trading