EUR/USD is up above figure 13 bottom as Washington is said to ask Beijing for the stable yuan
Donald Trump doesn’t cease to alter economic laws. Not so long ago, investors were surprised how one could urge the Fed to stop hiking the interest rate if the huge fiscal stimulus should drive the inflation rate up. How could the US foreign trade deficit be cut down if the strong domestic demand and retaliatory tariffs would increase the import cost, but the U.S. wouldn’t just have enough capacity to boost the export? And, finally, how could the yuan be kept stable if Chinese economy slows down and the PBOC eases its monetary policy. The US president proves that the impossible is possible!
New York Fed president John Williams is satisfied with the current level of the federal funds rate. According to the FOMC official, included in the TOP-3, it can be raised only provided that the GDP and the inflation rates make a pleasant surprise. The derivatives market stopped believing in the further monetary normalization and bets on more than 10% likelihood of the interest rate cut in 2019. Trump’s first target is reached, the Federal Reserve has finished monetary normalization. The EUR/USD is up above figure 13 bottom on the expectations of the FOMC dovish rhetoric at the January meeting.
China is willing to artificially boost the US imports by means of moving the assembly plants of semiconductors to the U.S. from Mexico and Malaysia. In addition, the US lower domestic demand amid a gradually weakening effect of the fiscal stimulus, as well as a potential abandoning or a reduction of the tariffs, will result in reduced imports. The US foreign trade deficit can well go down, and Trump will be praised again.
The issue of the stable yuan amid a decline in China’s GDP growth and the necessity of expanded monetary stimulus is rather painful. The Fed former president Janet Yellen noted that some tools, used by the central banks to stabilize the economy, would result in weaker local currencies. It very hard to draw a very fine line between FX manipulation and monetary policy. However, the EUR/USD rate is rallying up as Washington is said to urge Beijing for a stable currency. The euro is moving in sync with the yuan, which further evidence that the euro-area economy depends on trade wars.
Dynamics of euro and yuan
Source: Trading Economics
The U.S. may keep the yuan stable on its own. By means of the dollar weakening. In 2018, the USD/CNY was 5% up, having reached its 10-year high; however, it has been 2% down since then, also because of a change in the Fed’s policy course.
So, Donald Trump can set ambitious goals and reach them. I won’t be surprised if his dream about the weak greenback come true. Therefore, I’m still sticking to my December middle-term forecast about the EUR/USD middle-term consolidation in the range of 1.125-1.165. The short-term swings and ranges may vary, but the pair is likely to go up. Unless, of course, the U.S. unleashes a new trade war. With the EU.
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Price chart of EURUSD in real time mode
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