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The U.S. and China: Showdown or Love Fest?

When studying commodities and engaging in price forecasting, there are many fundamental factors to consider besides supply and demand. While the grain market talk currently focuses on planting weather in the U.S., I can’t help but keep an eye on U.S. and Chinese economic situations and currency values. Let’s first start with the U.S. dollar.

As noted in previous writings, a lower U.S. dollar makes it less expensive for other countries to import our American commodities. Grain exports are running ahead of USDA projections. This is due to a combination of ample supplies, low prices, and a U.S. dollar that’s quietly sneaking lower since Christmas.

The U.S. dollar, if you remember, had climbed to a 13-year high after U.S. President Trump won the election in early November. It hit 103.75 at its peak in December 2016. Yet, the index has slowly given up those gains over the past few months due to a combination of presidential scandals that soured investors’ taste in investing in the greenback. Some are now questioning if the new administration will be able to pull off campaign promises of a better U.S. economy.

In late May 2017, some of those doubts and fears were shaken off; the index actually inched higher after U.S. GDP surprised to the upside, showing the economy is seen growing at an annualized 1.2% in the January-March period (vs. 0.9% forecasted and 0.7% previous). Hmm. Perhaps the U.S. isn’t doing badly after all?

Looking at a bigger picture of the U.S. dollar index, it has been essentially trading in a sideways pattern since 2015. Support comes at the 92.00 level, with the high near the 104.00 level. It’s almost like the market is waiting patiently to make sure the U.S. economy is truly recovering in a long-term healthy manner, while also watching and keeping tabs on China.

It’s no secret that China’s economy has slowed down the past 10 years following the extreme economic boom it enjoyed in 2007. And you’ve heard the chat about China doing its best to keep growth happening in order to avoid a stall out and free-fall. Recently, Moody’s Investors Service downgraded its rating of China’s sovereign debt one notch, citing concerns over growing debt in the country. The thought is China will have to borrow more to maintain the current economic growth. Like the Federal Reserve and the European Central Bank, China is also pumping money into its financial system.

The ultimate point in all this? Remember how tough President Trump was talking about making trade fair with China? Notice now how his tone has softened? The U.S. and China are walking a very thin tightrope. Some suggest that we need to make sure China makes it through this “period of slower growth” even if it means we give them an oxygen mask from time to time. Our economies are also intertwined. China continues to be our largest trading partner, with $579 billion in goods exchanged in 2016.

Monitoring the dynamics between the U.S. and Chinese economies, to me, matters as much as watching weather patterns for the crop trying to grow throughout the U.S. this summer. It might not matter if the crop ends up smaller than expected because of too much rain early in this growing season, especially if we end up having no one to sell it to. Remember the old saying, “If the U.S. sneezes, the world gets a cold.” That same saying can now be applied to China. The global geopolitical consequences might take the world from catching a cold to going on life support. Let’s all keep a careful eye on China’s economy and prepare our own marketing plans for what could come.

If you have questions, you can reach Naomi at nblohm@stewart-peterson.com.

 

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