Bitcoin (BTC) 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.
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.
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
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
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, 2019https://platform.twitter.com/widgets.js
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 (BTC) 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.
Bitcoin is currently trading healthily above its 50-day moving average.
BTC/USD 1-day candles, 5 August 2019, Coinbase. (Chart source: TradingView)