A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Oil and the dollar rose on Tuesday and U.S. stocks fell, as investors baulked at signals from Washington and Tehran that peace talks have not yet been confirmed. This comes a day before the U.S.-Iran ceasefire deadline, which President Donald Trump extended after markets closed. 

In my column today, I look at why China's exchange rate may not be as chronically undervalued as many analysts say. True, China's external surpluses are large and widening global imbalances, but much of this is offset by China's huge financial account capital outflows.

Before you read on, don't forget to sign up for my upcoming LSEG webinar on April 23, where I will talk about safe havens in uncertain times with my ROI colleague Mike Dolan. 

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* Duel on the Hill

Fed chair nominee Kevin Warsh's confirmation hearing was a contentious affair as he blamed the central bank for the post-pandemic inflation surge, fended off questions from senators on President Trump's influence over policy decisions, and refused to directly say that Trump lost the 2020 election.

There could be quite a bit of change afoot at the Fed if Warsh is confirmed - he called for "regime change" to include a new "framework" for controlling inflation, and a possible overhaul of how it communicates with the public. Monetary policy independence remains "essential" though, Warsh said.   

* Trump's art of the ... no deal?

U.S. President Donald Trump is not one for keeping his views on private sector businesses or executives to himself. Several CEOs and execs have come into his line of fire, and share prices have often moved significantly, in both directions. 

On Tuesday, it was the airline sector's turn to be in the spotlight, as Trump said he opposes a potential merger between United and American, and also said he would "love somebody to buy" Spirit Airlines, which is in bankruptcy. 

* Apple fluffs

Talking of upheaval, huge news from Apple late Monday that CEO Tim Cook is stepping down in September to become executive chairman, and will be succeeded by company veteran John Ternus. Shares fell 2.5% on Tuesday, the biggest fall in two months, since just before the Iran war started.

The focus now is what Ternus does on AI. As analysts note, Apple's press release on his succession didn't mention AI once. Does this mean Apple will look to embed AI capabilities into existing devices rather than pursue a single transformative product? If so, it could be risky in a world in which innovation is king.

China's yuan is undervalued, but maybe not as much as you think

How undervalued is China's yuan, and how much is this driving the renewed widening of global imbalances? The answer is a bit more complicated than Beijing's massive surpluses might suggest.

Although the yuan, also known as the renminbi, is currently trading at its strongest nominal level against the U.S. dollar in more than three years at around 6.80 per dollar, most observers agree it should still be a lot stronger based on economic fundamentals.

China's official current account surplus last year was $735 billion, just over 3% of gross domestic ‌product, or roughly 30% of combined global current account surpluses. And its official trade surplus was $1.2 trillion, about 6% of GDP and nearly 40% of all global trade surpluses. These figures are both at record levels in nominal terms, and represent huge footprints for just one country.

If these data points were the sole determinants of the yuan's value, the case for a significantly stronger exchange rate would be irrefutable.

But the wider flow of funds has not been exclusively one way.