JPMorgan sees the all-in US-China rates, lowering the yuan call

Real bundles of Chinese hundred-hundred-yuan banknotes and American hundred-dollar banknotes. (Bloomberg photo)

NEW YORK: JPMorgan Chase & Co. do not expect a restart of the trade negotiations between the US and China and now expect an escalation of the tensions that higher US rates will see on all Chinese imports, pushing the yuan in more to the weakest of the dollar than a decade.

"JPMorgan has adopted a new baseline based on a US-Chinese endgame with 25% US rates on all Chinese goods in 2019," JPMorgan strategists including John Normand wrote in a note on Friday.

Although the growth expectations for both the US and China are not very affected, thanks in part to Chinese stimulus measures, "a weaker yuan becomes part of the new balance," they wrote.

The People & # 39; s Bank of China is likely to pursue a looser monetary policy to support growth in light of the trade threats, and is unlikely to intervene much to counter the resulting downward pressure on the yuan, according to the JPMorgan analysis.

The bank now expects the yuan to fall to 7.01 per dollar by the end of December and 7.19 in September 2019, after projecting earlier at 7.02 in 12 months.

The Chinese currency closed at 6.8725 per dollar last week in the onshore trade. The median forecast of analysts surveyed by Bloomberg is to strengthen the currency to 6.70 by the end of next year.

Deutsche Bank AG is one of the yuan-bears, which depreciate to 7.4 next year.

"Breaking Chinese monetary policy will make the US dollar for the remainder of the cycle an ever-expanding yielder than the renminbi", wrote the JPMorgan strategists, using a different term for the Chinese currency.

The yield gap will benefit the dollar thanks to further tightening of the Federal Reserve, ahead of the team.

A cheaper yuan will drag the currencies of the emerging Asian countries, with write-downs likely to exceed the forward rates for all but the Indian rupee and Indonesian rupiah, the bank said.

While the weaker Japanese exports of capital goods to China would increase the risks for the yen, the bid for safe havens is likely to dominate over time, JPMorgan currency trajectories led by Paul Meggyesi wrote in a separate note.

They see the yen at the end of the year at 111 dollars and in September 2019 at 109, currently no 114.

As for cross-asset investment strategy, the Asian currency is declining "are possible restrictions on regional equities," wrote Normand and his colleagues.

The price of base metals, however, should rise to 2019, thanks to lower inventories.

The new baseline of the trade war also raises questions in the medium term for the world's most expensive stock market (US) and one of the cheapest (China), "they wrote.

US earnings expectations are under pressure due to higher costs due to tariff increases. "Full rates can lead to the first loss of revenue in the Trump era."

For Chinese equities, which have entered a bear market, even as US benchmarks climbed to record highs, expectations depend on the country's success in boosting consumption and sectors such as technology and e-commerce, say JPMorgan strategists.

If that rotation does not continue, "Chinese assets can keep a risk premium for some time," they said.

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