USD/CNY could be used as a weapon in the ongoing trade war – Rabobank

According to Jane Foley, senior FX strategist at Rabobank, with the escalation in the trade war between the US and China in the past few days, the question is whether recent events will trigger a full blown currency war and how far the cross fire will extend.

Key Quotes

“By setting the daily fix for USD/CNY a little lower than expected this morning, the PBoC has breathed a little calm into global markets. Anxiety levels, however, are running deep.  The decision by the US Administration to label China a “currency manipulator’ yesterday is a hugely charged political statement.”

“It is possible that Trump has a desire to be seen to be taking a firm stance against China for his domestic audience ahead of next year’s election.  It is also possible that China’s decision to allow USD/CNY to slide above the 7 level yesterday was a warning to the US, that the currency could be used as a weapon in the ongoing trade war between the two countries.”

“According to the US “in recent days, China has taken concrete steps to devalue its currency”. USD/CNY is trading over 2% higher than its level at the start of this month.   Arguably, however, the CNY was due a depreciation in reflection of the slowdown in domestic growth and the policy easing announced this year by the PBoC.”

“A significant and rapid move lower in the CNY could send shockwaves through the global economy. China is the world’s largest importer of commodities and a considerable consumer of goods produced in the Asian region.  A weaker CNY could thus prompt a broader currency war.”

“Although the topic of whether the US Treasury would intervene in the FX market is topical, this would go against the grain of years of G7 accords which maintain that markets should set exchange rates.”

“While it is impossible to second guess Trump, US FX intervention is thus still unlikely.   That said, a currency war is a clear threat and the signals made by both the US and China over the next few days and weeks will be watched closely.”