THE DAILY MACRO BRIEF: US rates, post-Brexit alliances, Declining rates in Asia, Yuan at its lowest, Rome/ Brussels...

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08/07/2019 | 02:50 pm
Tensions persist between Beijing and Washington, which is dampening growth and raising expectations among some operators for a further decline in Fed rates. Jeremy Hunt's replacement as Minister of Foreign Affairs, Dominic Raab, meets with his counterparts in the US to strengthen economic alliances. The prospects for a no-deal are growing. In Asia, central banks are lowering their key rates. The Chinese currency remains at its lowest level since 2008.
The escalation of the Sino-American trade dispute is weighing on growth, Trump is ready to discuss. The world's leading economy is showing more and more signs of slowing down (falling trade, fewer new jobs, etc.) and its prospects are deteriorating. In this context, one of Donald Trump's main trade advisors, Peter Navarro, believes that the Fed should significantly lower its rates this year. James Bullard, a member of the Fed's Monetary Committee and Chairman of the St. Louis Fed, dampened these expectations, saying that the Fed had already done a lot to support growth. U.S. President Larry Kudlow's adviser yesterday said that the president "wants to continue the negotiations and wants to reach an agreement but it has to be a good agreement for the United States".

London wants to strengthen its alliances with Canada and the United States. At its first bilateral meeting in Toronto, Dominic Raab, the new head of British diplomacy, met with his Canadian counterpart Chrystia Freeland yesterday morning. He wants London-Toronto relations to move to a "higher level" in terms of trade once the United Kingdom leaves the European Union (the U.K. is Canada's largest trading partner in Europe). The two ministers also agreed on the need to strengthen their cooperation on security and the fight against climate change. Dominic Raab then went to Washington, D.C., where he met Mike Pence. The themes of China, Iran and a potential post-Brexit trade agreement were discussed. The Minister of Foreign Affairs is then scheduled to travel to Mexico.

To come back to Brexit. Europeans are preparing for a no-deal, aware that the new Prime Minister Boris Johnson is ready to take the United Kingdom out of the EU without an agreement next October, and still determined not to give in to this threat. "It is not clear why the Union would give Johnson what it refused Theresa May, for whom it had some sympathy," said a European diplomat.

Declining rates in Asia. In New Zealand, the Central Bank lowered its rate to a historic low of 1% (previously 1.50%). In India too, the Central Bank has decided to reduce its main key interest rate from 5.75% to 5.4%. The same applies to the Bank of Thailand, which reduced its refi rate to 1.5% (against 1.75%).

The yuan doesn't go up. Last night, the People's Bank of China again reduced the yuan's central rate, just under USD 7 (USD 6,9996 to be precise). The PBOC, which controls the exchange rate of its currency, allows it to fluctuate by more or less 2% from the fixed rate. This morning, the USD/CNY is worth 7,043. This is the third day in a row that the Chinese currency has traded at 11-year lows against the greenback, fueling the conflict with the United States, which yesterday included China on its list of currency- manipulating countries.
New arms in sight between Rome and Brussels. While Economy and Finance Minister Giovanni Tria expects a deficit of less than 1.8% of GDP by 2020, Deputy Prime Minister Matteo Salvini yesterday pleaded for a deficit above 2% of GDP in 2020, raising fears of further tensions with the European Commission.

The French trade deficit is widening. The trade deficit fell from 3.28 billion euros in May to 5.19 billion in June.
Romain Fournier 2019
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