As the US and China continue to battle over tariffs, the recent devaluation of China's currency, a widely perceived retaliation to additional US taxation, could have a negative effect on metals, according to a variety of market sources.
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This week China pegged the yuan at above 7 to the USD for the first time in a decade. The Trump administration was quick to suggest the move was "currency manipulation."
This was the latest in a long line of saber-rattling moves from both sides, which whipsaws global sentiment and drives uncertainty -- the market's biggest enemy.
Keval Dhokia, commodities analyst at Market Intelligence, part of the S&P Global family of businesses, told Platts: "With the probability of prolonged trade restrictions rising, China has allowed its currency to breach the long-defended 7 level against the USD as of August 5 for the first time since 2008."
The devaluation of the Chinese currency as a trade war weapon reduces China's purchasing power for US dollar-denominated goods and is, therefore, a negative for prices of mined commodities, according to brokerage company Jefferies.
"Chinese demand for most metals has been weak," Jefferies said of the year to date, "and the recent escalation of trade wars is a clear concern."
In its note to clients, Canadian bank BMO was also bearish the outlook for industrial metals.
"While the pressure had been building for a while [for China to adjust the yuan/USD exchange rate], such that this move was becoming a case of when rather than if, a combination of further tariff threats and market unrest provided an opportunity for the shift. Although the move is small in absolute terms, it is meaningful in terms of messaging and sentiment. A depreciating RMB is bad for industrial metals," the bank said.
Colin Hamilton, senior analyst at BMO, added: "China is, after all, the marginal buyer of metal units in the world, and all things being equal, purchases are now more expensive in USD terms. As such, market forces should see the USD price come down to match the depreciation, otherwise demand is destroyed. Moreover, purchasing managers in the global industrial economy will become increasingly cautious on potential global growth, creating a second-order impact."
Recent trade data, as analyzed by Panjiva, another member of the S&P Global family, showed that US international trade in goods and services fell 0.4% year on year in June. Although this sounds bad on paper, it could highlight success in US President Donald Trump's strategy, Panjiva said.
The biggest drag on trade with China was US exports being down 16.8% versus imports, which fell 12.6%.
"While that would indicate the US lost out, in dollar terms, its exports only fell $1.82 billion year over year, whereas imports fell $5.61 billion," Panjiva said. "That would suggest the US 'won' the trade war on balance in June, increasing the likelihood that President Trump will make good on his threat to apply duties to all Chinese exports from September 1."
In the US there was some cheering of Trump's candid language regarding the exchange rate.
The US Treasury Department's move Monday to designate China as a currency manipulator is welcome news for the steel industry and overall US manufacturing, according to American Iron and Steel Institute CEO Thomas Gibson.
"China was, and remains, a currency manipulator," Gibson said in a statement. "The Chinese government's actions are just one more instance of its active role in manipulating the value of its currency to promote Chinese exports."
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