China's Currency Manipulation

08/06/2019 11:38 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The U.S.-China trade war escalated as China reset its currency.

Trade war salvos are going back and forth as the U.S.-China trade war has now shifted focus to currency manipulation. Yesterday’s Chinese move to set the yuan at a seven-year low was seen as a move that China would use currency manipulation to support its markets and retaliate against President Donald Trump’s trade war. 

The move by China stoked fear in the marketplace not only because China said they will stop buying all U.S. agriculture products, but they also sent a signal that they would be using their currency as a weapon in trade. 

Yet after the close, the U.S. struck back by designating China as a currency manipulator.  The U.S. Treasury Department put out a statement that cited, “The Omnibus and Competitiveness Act of 1988 requires the Secretary of the Treasury to analyze the exchange rate policies of other countries. Under Section 3004 of the Act, the Secretary must "consider whether countries manipulate the rate of exchange between their currency and the U.S. dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade. Secretary Mnuchin, under the auspices of President Trump, has today determined that China is a Currency Manipulator. As a result of this determination, Secretary Mnuchin will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”

China seemed surprised by the move and equity markets overnight have rebounded some because it is clear the evidence is overwhelming, and most members of the world community know that China is guilty of currency manipulation.

In response, China’s central bank today set the yuan’s reference point higher than expected after the currency fell below the level of 7 to the U.S. dollar in what seems to be a currency manipulation retreat. China now realizes that if they use its currency as a weapon it will not just have to answer to the United States but to all of the countries in the G20. If China has any shot at winning a trade war it needs other trading partners to support it. They would be the same partners who already feel they have not been dealt with fairly by China.   

The United States used China’s own words against it. In its statement the Treasury said, “the Chinese authorities have acknowledged that they have ample control over the RMB exchange rate. In a statement today, the People’s Bank of China (PBOC) noted that it, “has accumulated rich experience and policy tools and will continue to innovate and enrich the control toolbox and take necessary and targeted measures against the positive feedback behavior that may occur in the foreign exchange market.” This is an open acknowledgement by the PBOC that it has extensive experience manipulating its currency and remains prepared to do so on an ongoing basis. This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation. 

Yet trade war fears are still stoking fears of weak oil demand. Oil is rebounding but it is still wobbly because it fears the potential trade war fallout. Brent crude took a much larger hit than the WTI contract partly because of new North Sea production but also because there are fears that the combination of a trade war and a “hard” Brexit will hurt European demand more than U.S. demand.

Yet crude oil will get hard data on oil inventories that may alleviate the fears of a sharp drop off in demand. The American Petroleum Institute will report on inventories. We are expecting draws across the board. Private Intelligence forecasters are calling for another modest draw in Cushing, Oklahoma. 

The U.S. also put tougher sanctions on Venezuela. The Wall Street Journal reported that, ‘the Trump administration imposed a total economic embargo against the government of Venezuela, a significant escalation of pressure against the regime of President Nicolás Maduro and countries including Russia and China that continue to support him, a senior administration official said.” "President Trump late Monday signed an executive order freezing all government assets and prohibiting transactions with it, unless specifically exempted, the first action of its kind against a government in the Western Hemisphere in more than 30 years. The move places Venezuela on a par with North Korea, Iran, Syria and Cuba, the only other countries currently under such stringent U.S. measures."  
Iran is issuing another ultimatum to Europe. Find a way for them to sell oil or they will further exceed limits on uranium enrichment. This as Iran seized a vessel it accused of smuggling fuel in the Persian Gulf, the third time the Islamic Revolutionary Guard Corps detained a ship in the waterway in recent weeks. 

Natural gas once again is trying to find a bottom. While we may bounce, sell into it. 

Contact me to get my daily trade levels and updates on all major markets at pflynn@pricegroup.com

Get a flower in your hair! MoneyShow San Francisco is right around the corner where I will be discussing Crude oil in the Age of Trump and al things energy.

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