The Chinese Yuan has dropped from 6.4000 to almost 6.9000 against the dollar and is retesting the weakest levels of the year in light of the stumbles in trade negotiations with the US, the release of weaker domestic economic activity data out of Beijing, rumors of retaliatory US Treasury sales by China, and now, the threat by President Trump of restrictions on foreign mobile phone sales into the US on national security concerns that is almost certainly aimed at China’s ZTE and Huawei.
** In noting the weakness in the Chinese Yuan, Chinese official sources indicate the People’s Bank of China has to date refrained from intervening directly in the currency markets to stem its fall, even after the US announced the escalation of tariffs on $200 billion of Chinese imports from 10% to 25% last week.
** Furthermore, so long as there is no “full-blown trade war” with the US, these sources assure there is no need to fear or expect the Yuan, or Renminbi, to weaken beyond (break above) the key 7.000 psychological level against the dollar that has held already twice before despite strong downward pressures, once at the end of 2016, and then again in the fall of 2018.
** However, should talks stall and the two sides escalate into that dreaded “full-blown” trade war, we are also told there would be no line in the sand whatsoever on FX, and the PBoC would see no need to defend the 7.000 level against the dollar, presumably even if the break of that level at long last were to risk some potential domestic outflows in the process as well.
On a somewhat more reassuring note, Chinese officials maintain it is “foreseeable” that if the US side were to respect China’s three bottom lines on trade negotiations as laid out by Vice Premier Liu He, the two sides could reach a trade agreement – “in the next few months.” If and once an agreement is reached, the RMB will appreciate against the dollar, and in the meantime, officials insist there is no reason to be overly pessimistic on the RMB.
But to the more cynical, the linkage between the progress of trade talks and FX may be less than reassuring.