Forex Comment Apr 20

Dollar, yuan steady on mixed oil, rates signals

Bonds still the best bets in climate of uncertainty

by Uwe Parpart
Dollar, yuan steady on mixed oil, rates signals

(ATF) China yet again eased monetary policy significantly as it cut the one-year loan prime rate by 20bps to 3.85% and the five-year rate by 10bps to 4.65%.

The consensus of the Central Financial and Economic Affairs Commission under Liu He is that the economy, even as most larger firms are returning to work, will need all the financial stimulus it can get.

You'd expect that the yuan would weaken as a result of the rate cut. Alas, it didn't. The People’s Bank of China set central parity at 7.0657 Monday morning. But CNY stood largely unchanged at 7.0680 at 7pm HK time.

What happened? Abject oil weakness happened. Oil storage facilities, onshore and floating, are filled to the gills.

Russia-Saudi cuts wont change that. WTI crude futures traded at an astonishing $13.18/bbl. No one has seen anything like that in this century.

US Treasury yields dropped on the unmistakingly obvious sign of continued economic weakness. Attempts by the greenback to stick its nose above 100 failed. Central bank super-liquidity so far easily trumps the fear factor and concerns over renewed dollar shortage.

To me at least, bonds globally, higher yield ones included - as with China local currency bonds - are the preferred option in this “climate".

Among other major currencies, JPY and EUR are making a good run. As Europe emerges more convincingly from the coronavirus plague than the US, that will continue.