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China and US Relations Raises Global Market Risk, Watch USD/CNY

China and US Relations Raises Global Market Risk, Watch USD/CNY

2016-12-07 04:30:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The US and China are the world's largest economies
  • Already tenuous relations between the two have been further exacerbated recently by the US President-elect's remarks
  • Eight-year highs for USD/CNY can quickly turn from favorable winds for the exporter to sign of capital flight

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Complacency is a common feature of the global financial landscape. Therefore, it isn't surprising that the growing tension in US-Chinese relations doesn't draw any significant attention from the average global macro trader. However, markets move in cycles and this manufactured lull has passed the bounds of reasonable doubt some time ago. As such, traders would do well to keep close tabs on those points of financial strain that could quickly turn into fodder for systemic crises. Given the size of the two countries in question (the world's largest), the rise of anti-globalization in the western world and the degree of speculative reach represented in these financial centers; there are few points of tension that are more foreboding.

In the weeks since the US Presidential election, the pressure has grown exponentially on US and China's relationship. President-elect Donald Trump ran on a platform of taking a strong stance against perceived, unfair trade practices - and China was a frequent target of his ire. What relief may have been found through expectations that the new head of state would ease his push as he has on a number of other, highly politicized campaign promises was snuffed out this week. A call to the President of disputed Taiwan drew questions of intention. In response, Donald Trump reiterated claims of China's currency manipulation and tariffs as well as the controversial build-up of military presence in the South China Sea.

While the relationship between these critical global players represents an unprecedented catalyst for the market, it is the environment can supply the reach of wholesale speculative deleveraging. Where the quiet in the global and US markets draws a degree of skepticism from even the most ardent bull, the remarkable quiet in Chinese markets stands out like a sore thumb. The exchange rate is perhaps the most essential measure of risk in the drama. A climb to 8-year highs for USD/CNY would have once been seen as a boon for the status quo in the traditional consumer-producer relationship these two countries had. Under the auspices of a trade war, it could quickly turn into the kind of capital flight signal we have seen during Brexit or the sharp market declines of January this year and August 2015. We revisit this important dynamic in the financial system and discuss its current bearings in today's Strategy Video.

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