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Fast Comment ChinaChina takes trade war to a higher level by allowing its currency to depreciate

  1. USD/CNY allowed to move above 7
  2. The currency weapon is being utilised
  3. We now expect further weakening of the CNY
USD/CNY allowed to move above 7
The Chinese exchange rate vs. the dollar (USD/CNY) has, for the first time since 2008, been allowed to move above 7. Until now, the Chinese authorities have stopped the CNY from depreciating above the psychologically important 7.0 threshold, despite market pressure for a weaker CNY.
The currency weapon is being utilised
The authorities have explicitly linked the depreciation to the ongoing trade war and, specifically, Trump’s threat to impose tariffs on all imports from China. The move was announced alongside a stop for imports of US agricultural products by state-owned agricultural firms. Thus, there is no doubt that the currency move is not just fine-tuning of the exchange rate. Clearly, China has taken the trade war to another level. Seen from China’s perspective, a weaker currency offsets the negative impact from US import tariffs. However, it will surely not improve the climate at the trade negotiations, and Trump is likely to retaliate soon. Thus, global stock markets and risky assets in general will likely suffer while safe havens will thrive.
We now expect further weakening of the CNY
We had expected the USD/CNY to be kept below 7, and we will have to revise our USD/CNY forecast. We had expected China’s authorities to stick to their policy of keeping the CNY ‘basically stable’ in effective terms. The Chinese central bank argues that it can still maintain a steady currency and that the CNY continues to be stable and strong against a basket of currencies. However, with the genie out of the bottle (USD/CNY above 7), we now see USD/CNY moving further up as the trade negotiations sour.

Disclaimer

Bjarke Roed-Frederiksen

Senior Economist

Latin America and China

bjro03@handelsbanken.dk

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