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YUAN, US CHINA TRADE WAR – TALKING POINTS

The Chinese Yuan gained ground against the US Dollar on Monday following the publication of China’s white paper which detailed where the country stands on trade relations with the United States. China listed its perspective on trade talk progression which mentioned multiple occurrences of the US backtracking on previously agreed upon commitments.

The white paper stated that “the US government should bear the sole and entire responsibility for the severe setback to the China-US economic and trade consultations.” Although, the text concluded that China remains committed to “credible consultations based on equality and mutual benefit,” adding that “cooperation is the only correct choice.”

USDCNH PRICE CHART: DAILY TIME FRAME (OCTOBER 22, 2018 TO JUNE 03, 2019)

USDCNH Price Chart US China Trade War Currency Technical Analysis

Along with a better-than-expected reading on the China Caixin Manufacturing PMI, which likely contributed to Monday’s gain in the Yuan, the relatively optimistic tone in the conclusion of the US China trade war white paper could provide markets with hope that economic relations between the two countries will not deteriorate further. With China leaving the door open for future trade talks, tension could decrease and present an opportunity for trade talks to get back on track towards reaching a deal.

The latest drop in USDCNH follows a pullback from technical resistance posed by the 6.9500 handle. Spot prices failed to eclipse this level following the near-vertical climb in rates over the last month. USDCNH now faces its newest test of technical support around the 78.6 percent Fibonacci retracement line drawn from the high in November last year to the low printed in mid-April this year. A breakout below this level will likely provide additional evidence that markets are becoming more optimistic regarding US China trade relations. On the contrary, if spot USDCNH tops 6.9500, it could suggest that trade talks between the world’s largest two economies are unlikely to get back on track in the near future.

SHANGHAI COMPOSITE INDEX PRICE CHART: DAILY TIME FRAME (DECEMBER 27, 2018 TO JUNE 03, 2019)

Shanghai Composite Index Price Chart and S&P 500 Index Overlay

Performance in the Shanghai Composite Index appears less promising as the Chinese stock market barometer has remained under pressure since its steep selloff beginning late April. That being said, the ratio of the Shanghai Composite Index to the S&P 500 Index provides a bit brighter of a picture. The recent outperformance of the Shanghai Composite Index relative to the S&P 500 could suggest that the widespread selloff in global risk assets over the last month may be nearing an end.

But, US equity markets risk additional downside if China decides to puff its chest and retaliate further against Trump tariffs. The largest outstanding threats to stocks include the possibility of China weaponizing rare earth metals and restricting US technology companies from doing business in China. Also, massive amounts of stimulus from the Chinese government – as fiscal and monetary policy “still have sufficient room” for expansion according to the white paper – could continue bolstering the Shanghai Composite relative to the S&P 500.

USDHKD PRICE CHART: DAILY TIME FRAME (OCTOBER 01, 2018 TO JUNE 03, 2019)

Hong Kong Dollar Price Chart after China trade war white paper

As for the Hong Kong Dollar, USDHKD received some relief after knocking on the upper limit of the fixed-rate tolerance band throughout May. If the latest shift lower holds, USDHKD could signal that US China trade relations may improve from here. However, it is worth noting that the move to the downside in spot USDHKD could be largely driven by widespread weakness in the US Dollar over the last few days as Fed rate cut bets mount.

- Written by Rich Dvorak, Junior Analyst for DailyFX

- Follow @RichDvorakFX on Twitter