How China’s yuan dump on Monday took down US securities is beyond me.
Nothing in the move should have cratered the Dow Jones industrials by 760 points.
Here’s what happens when China cuts the yuan below 7 against the greenback:
- Chinese goods to the US get cheaper.
- Chinese nationals have less buying power.
- The Chinese government has been manipulating the yuan lower vs. the dollar in order not to raise prices to offset tariffs.
This all dovetails to what I wrote back in early June. It’s not about tariffs, President Trump wants China to raise the value of the yuan by 20% (probably 23% now) to make a fair trade deal between the two countries. Putting tariffs on thousands of items is not effective.
The fact that Treasury chief Steve Mnuchin came out and stated publicly for the first time in more than 25 years that China is a currency manipulator also confirms the above.
Seeing gold rise more than $20 Monday to go above the $1,475 an ounce mark explains the other aspect of the Chinese trade deal. China will only raise the value of the yuan if gold price are allowed to appreciate on an equal percentage basis to offset trade losses from other partners.
US equities will rebound over this week. I’ll chalk it up to most trading desks had lead traders off on vacation and the algos took over the selling. Just throw in a few Fed chief Jerome Powell considering another rate cut headlines and we should be all the way back by late Wednesday or Thursday morning.