Forex

How the trade war took a toll on the rupee, stocks

Lokeshwarri S K, BL Research Bureau August 05 | Updated on August 05, 2019 Published on August 05, 2019

The rupee is falling, following the Chinese yuan’s steep decline ushering in immense turbulence in financial markets

The famous domino effect that is much talked about in financial markets, is once more obvious in today’s trades. The Sensex is down over 600 points, The Nifty has lost around 200 points, the rupee is below 70 and GOI 10-year bonds yields have moved higher.

This fresh bout of selling began towards the end of last week with the US President, Donald Trump ratcheting up trade war tensions once again, with announcement of 10 per cent tariff on $300 billion of goods from China from September 1, in addition to 25 per cent tariff on $250 billion worth of imports.

This further impacted sentiment, that were already edgy due to the Fed’s hawkish policy statement. US stocks sold-off on Friday with the Nasdaq composite index and the S&P 500 recording their worst weekly loss in the year.

And there was utter mayhem in Asian markets on Monday morning with the Nikkei, Hang Seng and ASX trading more than 2 per cent lower. China’s Shanghai Composite was lower by a milder 0.81 per cent.

The turbulence has now hit currency market with the Chinese yuan moving to the lowest level in a decade, sliding below 7 against the dollar. It is obvious that China isn’t going to take US’ tariff threat lying down and intends to hit back through a weaker currency.

According to reports, the People’s Bank of China, set its reference rate for the currency at 6.9225, which is the lowest rate since December. The Chinese currency is allowed to fluctuate 2 per cent up or down from this band everyday. A weaker yuan is bad news for all countries that do trade with China as it affects their external accounts adversely.

The dollar index is trading off its highs recorded last week, at 97.9. But the US will now have to spend considerably in forex reserves to keep the dollar from strengthening, and hurting its economy further.

There is a run towards safe havens with the yen and US 10-year treasury bonds witnessing a jump in prices.

Riskier assets such as emerging market currencies have taken a hit with the rupee taking a sharp cut, falling below the 70 mark, to trade around 70.5 currently. There would be fear of money getting pulled out of Indian debt instruments if the trade war escalates and this is expected to further apply pressure on the rupee. India’s 10-year bond yield spiked to 6.4 per cent.

These increasing tensions are likely to make the RBI re-think on cutting rates aggressively in the upcoming monetary policy. India can not afford to let foreign portfolio outflows accelerate out of debt; which becomes imminent if the policy rates are cut too sharply.

Published on August 05, 2019
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