Noble Apex eNewsletter Issue 818- US FX Intervention Risk Could Be Another Overhang For Investors

2019-07-23 01:21
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22 July 2019 Issue 818

Global Market Commentary


  • US: The US-Iran situation is still tense. In addiction, it is expected that the Fed will only cut interest rates by 25 basis points at the end of the month, dragging down the stock markets. For the entire week, the Dow fell by 0.65% to 27154.2 points. The S&P 500 index fell by 1.23% to close at 2976.61. The Nasdaq fell by 1.18% to 8164.49 points.
  • Europe: Investors worried that the profitability of European banking industry will generally being affected if major central banks continue to cut interest rates in response to the global economic slowdown. Over the week, the UK’s FTSE 100 index rose by 0.04%, the German DAX index fell by 0.51%, and the French CAC40 index fell by 0.37%. The STOXX 600 index rose by 0.10% for the week, to 387.25 points.
  • Asia: Japan’s exports continue to decline, and South Korea unexpectedly cut interest rates, dragging down the Asian stock markets. For the whole week, the Nikkei 225 index fell by 1.01% to 21,466.99 points. The MSCI Asia Pacific Index rose by 0.38% to 160.94.


  • US: US Treasury prices have risen, and the number of housing starts in the US is poor. In addition, the market worried that the probability of no-deal Brexit will increase, causing funds flow into the bond market For the whole week, the US 10-year bond yield fell by 6 basis points to 2.05%.
  • Europe: ECB President Draghi hinted that the central bank will take action to boost the economy, which escalated the market expectations on interest rates cut. For the whole week, the German 10-year bond yield fell by 7 basis points to -0.32%.


  • Oil: The situation in the Persian Gulf is tense. In addiction, the market worried that the global oil demand will be decreased due to the economic slowdown. Over the week, New York oil futures fell by 7.61% to close at $55.63 a barrel.


  • US dollar: US retail sales in June exceeded expectations. The market believes that the US Federal Reserve is unlikely to cut interest rates by 50 basis points in July, pushing up the value of US dollar. For the entire week, the Dollar Index rose by 0.35% to 97.151.
  • China: China and the United States have resumed trade talks, but there is no real progress. The two sides are still stuck in the issues of large-scale purchase of US agricultural products and Huawei issue. For the whole week, the yuan fell by 0.04% against the US dollar at 6.877.


Economic-related News

  • US: US Treasury Secretary Mnuchin denied that Huawei issue is the crux of Sino-US negotiations and said that there are still many complicated issues.
  • US: Trump said that although Pelosi, the speaker of the United States House of Representatives, rejected the White House’s $150 billion proposal, he believes negotiations on raising the debt ceiling are still going well.
  • U.S: Federal Reserve Chairman Powell said that the Federal Reserve (Fed) is closely monitoring the downside risks of US economic growth and the Fed will take appropriate actions to maintain economic expansion.
  • Euro-zone: The situation in the Strait of Hormuz was tense, two British-related oil tanker were seized by the Iranian military. Iran claims that a British tanker was being detained since it has entered the Strait of Hormuz from the “wrong direction” and it will be detained until the judicial assessment was completed.
  • Euro-zone: Economists predict that the ECB will adjust policy wording at the July 25 decision-making meeting, releasing interest rate cuts signal, and take action at the next meeting after the summer recess.
  • Euro-zone: The EU stated that it is possible to identify certain 5G suppliers as having security risks. Moreover, it also pointed out that Chinese law requires domestic companies to cooperate with intelligence agencies.
  • Japan: Japanese Prime Minister Shinzo Abe’s party and his allies won the upper house election on Sunday, but it did not reach the absolute majority that needed to quickly advance the constitution.
  • Japan: The Japanese Ministry of Internal Affairs and Communications announced that Japan’s Consumer Price Index (CPI) rose by 0.7% year-on-year in June, rising for the 33rd consecutive months, in line with market expectations.
  • South Korea: South Korea’s central bank data showed that the South Korea’s Producer Price Index (PPI) in June fell by 0.3% from the previous value of 0.1% increase, the first drop within the last five months, and the decline rate exceeded the market expectation of 0.1%.
China Market Commentary
Economic-related news
• According to Xinhua News Agency, Chinese businesses have made inquiries with U.S. exporters to buy crops and agricultural products and applied for the lifting of tariffs. The relevant Chinese authorities claimed that US should implement its commitments.
• The Science and Technology Board opened on Monday and will have 25 new shares listed for trading. Analysts expect it will have a good performance on the first day. Moreover, the stocks in Science and Technology Board will be included in the Shanghai Composite Index from January 22, 2020.

US FX Intervention Risk Could Be Another Overhang For Investors

Never say never. The risk of a US move to direct FX intervention has lifted recently especially after Treasury Secretary Mnuchin on last Thursday said that there’s no change in Washington’s currency policy “as of now”, but leaving the door open to action (i.e. weaken the dollar) in the future. This “future” can happen in years, months or even weeks in particular the US President Trump likes to make surprise as what we have seen in his past three years presidency.


Indeed, US has adopted the non-interventionist approach on currency for about two decades. But with the Fed trade-weighted measure of the dollar isn’t much below its strongest since 2002, the American exporters are facing unfavourable headwinds against overseas competitors. This is exactly what Trump has complained thousand times about the overvaluation of the dollar, as supported by International Monetary Fund (IMF)’s model that the Dollar is overvalued by 8% to 16%. For instance, the ECB President Draghi’s comment of new stimulus measures last month (which could possibly weaken the euro relative to the dollar) has hit the nerve for Trump again, whom then tweeted by accusing Europe alongside China of “playing a big currency manipulation game” to gain unfair advantage over the US. The Bloomberg News later reported that the Trump has asked members of his staff to find ways that could weaken the Dollar because of ECB’s potential move.

Figure 1. US dollar trade-weighted board index rise to historical high

Source: Bloomberg, iFund/Noble Apex

Intervention may eventually lead to global devaluation

Despite the risk of FX unilateral intervention may continue to escalate before next year’s US presidential election, we think that if intervention were eventually happened, it may not be in the best interest of US over the long-term as other countries would likely to play the same game and eventually global devaluations would make everyone lose. Today, monetary policy among key economies is so interconnected that any one country would be difficult to notch any kind of victory for very long. Instead, direct FX intervention tends to work only when allies work together to achieve common goals, which happened in 2011 when the US along with international peers intervened in FX markets after the yen soared in the wake of the devastating earthquake in Japan that year. However, as international partners would be unlikely to coordinate with US to weaken the dollar at this stage, therefore US’s solo FX intervention at the end would escalate the international trade tensions to another high level only.


Global economic growth should be the key for exchange rate direction

All in all, we believe that the direction of the US dollar exchange rate should be determined by the difference in economic growth between US and the rest of the world in the long run. The strength of the US dollar in recent years is mainly due to the slowdown in global growth and rising risk, which has caused investors to hedge, plus negative interest rates in Europe and Japan. On the contrary, if the US wants to intervene in its currency, it means that it will need to increase holdings of non-US dollar currencies and assets with low or negative yielding, or to print much more US dollar. However, whether this is wise action or not is really questionable. Nevertheless, we believe the risk of FX intervention or global currency war to remain low at this stage, while the US has tried hard to avoid some of the most provocative currency actions (e.g., the US Treasury has avoided naming any trading partner as a currency manipulator, even China). On the other hand, the recent comments from US officials could be seen as a gesture of warning to the BOJ and ECB as to stop them from being too extreme on negative interest rate.

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