Image: AFP

Late declines in US stocks on Wednesday signaled a pause in the prevailing risk-on sentiment. Asian stocks picked up the signal and traded sideways on Thursday. European equities amplified the risk-off mode as did US futures.

For the US dollar, this was a sign of relief. It had fallen well below the 200-day moving average on the DXY (dollar index) and hasn’t quite regained neutral territory yet. But at 7pm HK time, the index stood at 97.5400 (up 0.30%) and rising.

Are we seeing just a breather for positive global equity sentiment or a more prolonged pause?

S&P500 valuations are definitely stretched. But looking at the surprisingly positive performance of the Chinese economy, the massive German stimulus package of EUR130 billion ($145 billion) and equally impressive fiscal moves by Korea and Japan, there are good reasons for optimism … provided that US President Trump, desperate about his re-election chances, doesn’t throw another spanner in the works.

The People’s Bank of China (PBoC) set yuan parity at a relatively strong 7.1012, the strongest since May 22. With the onset of risk-off sentiment and dollar gains, the yuan could not hold that level. It traded at a significantly weaker 7.1199 at 7pm. CNH, the offshore CNY, stood at 7.1256.

I see the yuan weakening as a tit-for-tat reaction to USD strengthening, not anything inspired by inherent yuan softness. Both onshore and offshore CNY have traded somewhat above the midrange since mid-March, but provided the Chinese economy continues its outperformance, the yuan is likely to strengthen going forward rather than track lower.

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