January 30, 5:00 pm EST
Remember, over the past three weeks, the major central banks in the world (the Fed, the ECB and the BOJ) reminded us of the script they have followed, and continue to follow, since the global financial crisis. They will do ‘whatever it takes‘ to keep the economic recovery going.
It took an ugly decline in stocks in December to resurrect the defensive stance from the architects of the decade-long global economic recovery. Confidence matters, as it relates to the economic outlook. And stocks heavily influence confidence.
With that, the Fed raised the white flag on January 4th when they marched out Bernanke, Yellen and Powell at an economic conference to reset the market expectations on monetary policy (moving from a four rate hike forecast for 2019 to a ‘wait and see’ approach). They solidified that stance today.
Removing this risk, of the Fed offsetting the benefits of fiscal stimulus, is continuing to prime global markets. And we get a break of this trendline today in stocks — from the correction that originated from the record highs of October.
With the Fed behind us, the attention turns to the U.S./China meetings, which are underway. Let’s revisit the one indicator from China that they are working to pacify the Trump administration. It’s the Chinese currency.
Remember, we looked at this chart back on January 11 of the U.S. dollar/Chinese yuan exchange rate …
In this chart, the falling orange line represents the Chinesestrengthening their currency. And, as we can see, they have been showing a willingness to make concessions, walking it higher since the December “trade truce.” Make no mistake, the trade war is all about China’s currency. Ultimately, a free floating currency in China would be the solution to the trade imbalances and dangerous wealth transfer of the past few decades. To this point, it has been reported that they are presenting a plan to balance trade with the U.S. in six years. Maybe currency is part of it. We shall see.
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