The turn for the worst that has transpired with the unforeseen breakdown in US-China trade relations over the past two weeks has accelerated a flurry of selling momentum in the offshore Yuan. The question that continues to linger in financial market headlines following the brutal period of late for the Chinese currency stands as a matter of when, and not if the offshore Yuan will weaken beyond 7 against the Greenback.

The USDCNH stands at time of writing marginally close to levels that have previously acted as the last line of defence for the Offshore Yuan; but what if authorities had a trick up its sleeve in the ongoing tit-for-tat tariffs and allowed the Yuan to freely weaken? This is a scenario that might still appear as unlikely and one that has not been priced in, but it is something that shouldn’t be ruled out following the escalation and it is a scenario that would lead to a round of shock for global investors.  

Think about it from the perspective of the Chinese economy. You thought, like the majority that a trade deal should by all accounts be concluded by end of the quarter but you now face headwinds from additional tariffs that were not expected just two weeks ago. These tariffs are serious headwinds to the Chinese economy and a threat that realistically puts a question mark on whether the 6-6.5% government target for economic growth in 2019 should be reassessed.

China will not be able to match the tariffs that the United States has put on its goods blow-for-blow and this is something that we have all been aware about since the trade tensions erupted over a year back. But, China could offset the upcoming economic pressures that the mainland economy will face in light of additional tariffs by allowing the Yuan to weaken further.

The likelihood of the trade tensions extending into the second half of the final year for the decade also highlights the potential that we should be preparing ourselves for an attempt by the Dollar Index to make another run for 100.

The steady climb in the Dollar Index over the past week or so hasn’t been documented that much, but I do think investors are hedging on the Greenback in anticipation of the trade conflict between the United States and China potentially extending into 2020. 100 in the Dollar Index would be a painful migraine for all currencies in the developing world, one which would make the second half of 2019 a troublesome end to the decade for emerging market currencies.

An advance towards 100 in the Dollar Index would stand as the final nail in the coffin in even the most doubtful of spectators that the offshore Yuan would not be allowed to weaken beyond 7. It would also marginalise buying demand for emerging markets at a time where they have not yet adapted to the incoming external headwinds, with restricted buying demand for emerging markets causing pain for currencies stretching from the Malaysian Ringgit to the South African Rand and even as far as the Brazilian Real.

Upcoming European elections to signal another push for right-wing in Europe; swing lower in Euro ahead?

The Euro has opened yet another week with low volatility as traders brace themselves for the upcoming European elections. Things have been quiet for Euro volatility in the FX space for a very long time, and one must wonder whether the upcoming European elections could be what the doctor ordered to inject some life back into a Eurodollar that has been asleep for most of the past year.

I am going to take the contrarian view and look at the upcoming European elections as the warning lights that risk the Euro falling to 1.10 for the first time since May 2017. The recent history of European politics suggests that the European elections will signal more power moving towards far-right political parties and this isn’t something that investors will be able to ignore forever.

If the European Elections do threaten the stability of the European Union, a great deal of concerning views on the outlook of the Euro can even lead to the discussion over Eurodollar parity making their way again. 

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