With little prospect of a restart for U.S.-China trade talks, JPMorgan Chase & Co. (JPM) now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade.
“JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25% U.S. tariffs on all Chinese goods in 2019,” JPMorgan strategists including John Normand wrote in a note Friday. While growth forecasts for both the U.S. and China aren’t much affected, thanks in part to Chinese stimulus measures, “a weaker yuan becomes part of the new equilibrium,” they wrote.
The People’s Bank of China will probably pursue a looser monetary policy to shore up growth in face of the threats to trade, and likely won’t intervene much to counter resultant downward pressure on the yuan, according to the JPMorgan analysis.
The bank now expects the yuan to drop to 7.01 per dollar by the end of December and 7.19 by September 2019, after previously projecting it at 7.02 in 12 months’ time. The currency was at 6.8857 in offshore trading Monday. The median forecast of analysts surveyed by Bloomberg is for the currency to strengthen to 6.70 by the end of next year. Deutsche Bank AG is among the yuan bears, seeing it depreciate to 7.4 next year.
“Looser Chinese monetary policy ensures that the U.S. dollar will become an ever-higher yielder versus the renminbi for the rest of the cycle,” the JPMorgan strategists wrote, using another term for China’s currency. The yield gap will favor the dollar thanks to further Federal Reserve tightening, in the team’s outlook.
A cheaper yuan will drag emerging Asian nations’ currencies lower with it, with depreciation magnitudes likely to exceed forward rates for all except the Indian rupee and Indonesian rupiah, the bank said. While weaker Japanese exports of capital goods to China would add to risks for the yen, its safe-haven bid will probably “dominate over time,” JPMorgan currency strategists led by Paul Meggyesi wrote in a separate note. They see the yen at 111 per dollar at year-end and 109 in September 2019, from just under 114 currently.
As for cross-asset investment strategy, the Asian currency declines “are possible constraints on regional equities,” Normand and his colleagues wrote. Base metals prices should still gain into 2019 thanks to reduced inventories, however.
The new baseline on the trade war also “raises medium-term questions for the world’s most-expensive equity market (U.S.) and one of its cheapest (China),” they wrote. U.S. earnings estimates will be under pressure due to higher costs thanks to tariff hikes. “Full tariffs could trigger first earnings downgrades of Trump era.”
For Chinese stocks, which have entered a bear market even as U.S. benchmarks climbed to record highs, the outlook depends on the country’s success in stoking consumption and sectors including technology and e-commerce, JPMorgan strategists say. If that rotation doesn’t keep going, “China assets could retain a risk premium for some time,” they said.
