The Daily Update - Don't You Dare, Ah You Did

After a delay, which is unusual, China responded last night to the US tariff proposal of last week with up to $60bln of imports with a 25% tariff which covers around 2500 US export items effective June 1st.

Strangely, the Chinese retaliation announcement came just 30 minutes after President Trump had tweeted a warning for China not to retaliate. He also said he still had not made a decision on adding additional tariffs to a further $325bln of Chinese goods and said he will meet with the Chinese leader in Japan next month at the G20 summit. In fact US Secretary Mnuchin said trade talks are continuing.

At the same time the Global Times editor in chief tweeted that China could use US Treasury sales as a ‘weapon’ in the ongoing trade war. Later he clarified that this was a personal opinion rather than citing a Chinese government source, which calmed the market somewhat. Indeed Treasury yields across the curve are lower this morning and back to levels last seen back in late March for a few days and end December 2017 before that.

We have always been sceptical of China using currency FX management in this way as any short term benefits would be vastly offset by longer term costs. However, interesting to see the latest IMF currency Composition of Official Foreign Exchange Reserves (COFER) report, which is as at end December 2018. This shows that 62% of allocated reserves are held in US dollars and 20.5% is in Euro while just 5% is in Japanese Yen and 4.5% in sterling. This report includes the reserves from 149 participating countries including China and excludes gold which comes under another reporting criterion.

Right on key, Fed voting member Rosengren said he expected the Fed’s balance sheet runoff to end in September, but that could change based on new information. He also noted that the Fed has the tools including rate cuts to deal with the trade situation adding he did not want to prematurely judge the situation.

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