Trump had tweeted that China is unlikely to close a deal
before Nov 2020 elections. This along with yesterdays 10% tariff announcement
on $300 bn of Chinese imports show that Trump is finding it difficult to get
the terms he wants from the Chinese. Therefore it is likely that Trump would
now start a new battle and most likely that would be a trade war with EU. If
PBOC prevents USDCNH from crossing 6.98 as it has been till now then within a
few days markets will start ignoring the US president again.
The negative dollar repercussion of the tariffs is that
markets have started factoring a 96% chance of a second rate cut by FED in
September. A 3rd rate cut in December is now 77% likely. These
chances were at 62% and 40% yesterday morning. If the elevated rate cut chances
persist then dollar index will eventually break lower as markets will get more
convinced that a rate cut cycle has started.
Therefore the arguments are evenly balanced on both sides of
dollar weakness and strength. I believe China will again be able to control CNH
at 6.98 and within a week the markets would start ignoring the trade war
threats.
Although on 30th July at 68.75 I had expected
69.30 to be seen and then after the FOMC I was of the view that 69.50 is
likely, I would continue to hold on to the view of 67 by September end. I
would want to revisit this view after RBI policy next week by which time the
heightened trade war tensions would also have alleviated.
USDINR CMP 69.28, Range 69.20-69.40 for the day. Overnight
longs are suggested for the time being given NFP and heightened trade war
tensions.
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