The official coronavirus death count has now risen above one million. This toll counts diagnosed cases of the virus where the new coronavirus has been listed as a cause of death. Frequently a nation’s death toll from COVID-19 has been subject to politics and a steep learning curve across the globe when it was first clear we faced a pandemic means that the true figure is likely to be considerably higher. New local lockdowns in Europe within the United Kingdom, France and Spain have prompted markets once again to reflect economic stresses with price action across markets increasingly similar to that during the height of the global lockdown. Despite the risk of a second phase of lockdowns across much of Europe, there is one economy that is standing out.
China pursued a severe and pervasive national lockdown following the emergence of coronavirus in the first quarter of this year. The lockdown encouraged a 6.8% contraction in first quarter GDP compared with the previous year. However, the success of China’s management of the pandemic facilitated a 3.2% expansion in the economy in the quarter April to June and, crucially, a current daily confirmed infection count consistently in the low double digits. The conclusion of this pandemic response is a forecasted 2020 GDP in positive territory, just shy of 3%.
The USDCNY exchange rate has moved lower in favour of the Renminbi to price in the outperformance of the Chinese economy. Rising volatility and concern over an unsustainably large net short positioning in the US Dollar do pose correction risks to the pair. For now, the People’s Bank of China’s has shown relative comfort to the rising cost of the Yuan that it has typically sought to avoid. The monetary authority has continued to set the daily peg at a level that has allowed markets to price in further Yuan strength. Having sold off during the first months of the pandemic, the pair has held below 7 Yuan to the Dollar since late July.
Tonight’s debate between Democratic and Republican Presidential candidates Trump and Biden also presents a risk to Yuan strength. Trump’s persuasion towards punitive trade terms with respect to China has been a defining feature of his term in the White House. Further threats towards China from the incumbent President during this debate could be a crowd pleaser but escalations in the trade war are Dollar, not Yuan, supportive. We are in a state therefore where economic fundamentals are and will continue to drive the Chinese Yuan higher. However, the combined risks of exchange rate manipulation, Trump’s coin flip foreign policy and wider financial market conditions pose a serious threat to this economic reality.
Discussion and Analysis by Charles Porter