The major news story of this last Monday in August, 2019, was the seeming collapse of the Chinese yuan against the dollar, and the resulting newfound willingness of China to resume trade negotiations with the United States. Depending on the particular bias of the news channel, this was either an a) uncontrolled drop in the yuan by currency investors fearful of Trumpian economic Armageddon, b) China playing hardball by deliberately dropping the yuan, or c) a sign of the "inevitable" Trump victory in the US trade "war" with China.
For the record, I think all three views are basically fertilizer, put designed to gratify the biases of a particular audience, with little regard to reality.
One problem with these simplistic monochromatic views of currency events is that they ignore other events that happen concurrent to the main narrative--events that indicate a different, larger, and more complex narrative applies. A news story that has been almost a footnote to the yuan collapse bears far more scrutiny than it has received: at the same time the yuan dived against the dollar, the euro dropped as well, and continued to trend down the rest of the day.
First, consider the yuan vs the dollar during the day's trading (26 August 2019):
The yuan dropped as much as 0.7% in overnight trading, before stabilizing--according to the financial chattering class, this was a collapse. However, the Euro began dropping as well a few hours after the yuan, and then continued to trend down the rest of the day.
The drop in the yuan itself is not hard to fathom: as the exporter in US-China trade talks, its currency is far more sensitive to tariff and other pressures, and the recent ratcheting up of trade rhetoric by Presidents Xi and Trump only serve to magnify those pressures. But how does a ramping up of trade tensions between the US and China weaken the Euro against the dollar? One would expect the flight-to-safety response to flow the other direction, from the dollar towards the Euro, as that is the direction presumably away from the trade conflict.
However, there is another data point that is perhaps relevant to this discussion: Germany's recent slide into recession is being blamed in part on weakening demand from China. The currency movements of the past day do seem to confirm that hypothesis--that any sort of economic downturn in China reverberates around the world to Europe. To be sure, there have been a number of warning signals coming from China of late, not the least of which is a slow-motion banking crisis, with China having bailed/nationalized three banks in as many months, with 19 banks that are either insolvent or about to be.
A full exploration of the interlocking relationships between the economies of Europe and that of China is beyond the scope of a single blog essay, and it is not my intention to explore that here. However, the little regarded drop in the Euro, coming as it does on the heels of a steep drop in th yuan, does confirm the influence the Chinese economy has over Europe. As goes China, it seems, so goes Europe.
That Europe is headed into recession is by now no longer news, but established fact. Yet if China is a leading indicator for Europe, and Europe is in a recession, does that not indicate significant economic weakness in China? While the legacy financial media is largely silent on this point, other than to note the linkage between Europe and China in passing, that linkage coupled with Europe's growing economic woes suggests that China's economic situation is rather more dire than the Chinese media will admit. With a raft of secondary indicators indicating significant economic weakness in China already, perhaps Europe provides a curious if counterintuitive confirmation of the depth of China's woes.
While the legacy media does acknowledge the levels of integration in the global economy, when discussing headline events such as the latest developments in the trade war between the United States and China, the reporting invariably reduces the story arc to simple linear causal relationship. Trump ratcheting up trade rhetoric along with President Xi is deemed the trigger for the drop in the yuan, and the decline in the euro is blandly written off as a flight-to-safety reaction. This despite the fact that a flight to safety would be in the opposite direction than what was observed.
The one thing that seems certain about the legacy media's prognostications about the state of the world is that they have the narrative all wrong. With respect to China and Europe, they have it provably wrong, which only begs the question what else do the chattering class "experts" have completely wrong?
Note: the currency graphs are courtesy of xe.com and were obtained using the following search parameters at the time of writing:
- Yuan to US Dollar: https://www.xe.com/currencycharts/?from=CNY&to=USD&view=1D
- Euro to US Dollar: https://www.xe.com/currencycharts/?from=EUR&to=USD&view=1D