A background of spreading trade protectionism and slowing global growth, capped off with a zero-sum currency war, is the last thing a frothy equity markets needed.
Bitcoin is currently trading up 8% at $11,787 on Coinbase on the back of a yuan devaluation that dramatically escalates the US-China trade war.
It is difficult not to ponder that a nightmare scenario for stocks might be opening up.
And this all comes as the US Federal Reserve’s 0.25% interest rate cut was greeted poorly by the cheap money-addicted stock market, even as interest rate cuts around the world are shown to have weakening effect.
$7-plus yuan triggers stock meltdown, gold, bonds and bitcoin rally
Gold and bonds are benefiting and so too is bitcoin, as we predicted in our previous report looking at Trump, China and the trade war.
Our suggestion to closely watch the yuan v US dollar exchange rate for a move above $7 as a trigger for bitcoin buying has been borne out.
The equity markets’ suffering in response to the devaluation of the yuan could worsen over the coming days. Bitcoin’s price rise as equities fall is an example of the much-vaunted negative correlation between the two asset classes, seen as one of the digital currency’s attractions.
As all economic historians know, a trade war is characterised by its tit-for-tat nature.
China has just bitten back against the US in a big way.
By allowing its currency to slip to the lowest level in 11 years against the dollar, the Chinese policymakers at a stroke have helped the country’s exporters to weather the tariff storm.
Much depends on how will the US respond. The obvious reflex is to increase tariffs further. But it could also designate China to be a “currency manipulator” which brings with it a whole world of pain for China.
Here’s the latest from US president Donald Trump:
China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!
— Donald J. Trump (@realDonaldTrump) August 5, 2019
One way to achieve this goal would be to weaken the dollar by reducing interest rates, but that’s what the Fed has just done and it hasn’t stopped the dollar strengthening.
The dollar is a safe haven asset and despite the financial firepower of the US, trying to turn back the flight to safety homing in on Uncle Sam is a thankless task.
Hong Kong in eye of the storm – bitcoin a major player
From the Chinese side of the bargain yuan devaluation means capital loss. Capital preservation through diversification away from the yuan is the order of the day for Chinese investors. In that light, bitcoin comes into play as a store of value, hedge against the devaluating currency, general economic uncertainty and geopolitical strife.
Simon Peters, an analyst at global investment platform eToro, makes similar points regarding the yuan: “The yuan has fallen against the dollar to levels not seen since the 2008 financial crisis, and Chinese investors are casting around for alternative assets for their wealth.”
He continued by email: “Gold, the traditional haven asset, has been a beneficiary of some of this investor uncertainty. Yet Bitcoin also seems to have served a similar purpose. Given that Chinese investors make up a large proportion of crypto investors, there’s a strong possibility some are backing Bitcoin’s chances against the yuan.”
Readers should also be aware that the crisis in Hong Kong is not being adequately priced in by both the crypto and equity markets. Hong Kong is where the Chinese rich park lots of dough and the implosion of China’s premiere artery to the dollar world will driver more investors to consider holding some bitcoin.
Bitcoin block halving support
Possible market meltdowns and geopolitical uncertainties aside, bitcoin block rewards are halving in May next year and that will support prices as scarcity collides with rising FOMO.
The road to a return to the year’s high at $13,800 is open.
“If demand for Bitcoin soars just as supply falls due to a halving in the block reward, we could see prices increase significantly in the long term. In the short term, the next major resistance level we’re keeping an eye on is $14,000 – if we see Bitcoin break through that level, the cryptoasset will be at prices last seen in the market highs of January 2018”, wrote Peters.
The $12,500 close on 5 July provides the near-term target at the time of writing.
BTC/USD 1-day candles, 5 August 2019
Bitcoin is currently trading healthily above its 50-day moving average.