China’s currency has slipped markedly in the last week, to the point where it’s trading at December lows against the dollar, and that’s prompting speculation that China would be willing to use a weakened currency to fight U.S. tariffs and trade threats.
But analysts say while the currency has made a clear move lower since trade rhetoric flared, the likelihood of China devaluing its currency to spite President Donald Trump is very low. For now it appears the currency's drop could just be a coincidence.
China has often been accused by the U.S. government of intentionally keeping its currency depressed to cheapen its goods in the world market, making them more attractive than those from countries with stronger currencies. The Trump administration this year stopped short of calling China a ‘currency manipulator,' and China’s currency has actually been fairly steady for most of the year.
“"If a bear is coming at you, why would you wave a red flag in front of it," said Robert Sinche, the chief global strategist at Amherst Pierpont.
But Sinche said while it does not seem China would intentionally drive its currency lower, it may have previously slowed the decline.
“It looked like they were impeding the dollar’s rise against the remnimbi, in line with what you normally expect given the general strength of the dollar. That caught up last week,” he said. “They weren’t letting the currency weaken as much as it should have, so the trade-weighted remnimbi was actually rising in that environment. I think they might have said, ‘The U.S. is not going to play nice, we’ll let the remnimbi trade as it should.’”
Nonetheless, rumors circulated that China could go further and actually become aggressive in forcing a decline in the remnimbi, also known as the yuan.
“The yuan is controlled. They allow it to trade in a band. In order to make sure they don’t have a runaway trade. What you’re seeing is the [speculators] took it by the upper limit of its band," said Boris Schlossberg, managing director at BK Asset Management. "I think the market is anticipating something, or they feel it’s going to be a natural policy response if this keeps up.”
Analysts note that the dollar has been weaker against major currencies, but emerging market currencies are under pressure as President Donald Trump threatens more tariffs and trade actions.
“It’s hard to read the tea leaves, but right now it really feels like the market is taking it up..it’s basically guys long dollar/yuan who are just spreading the rumor,” Schlossberg said. “If they did devalue, that would enrage Trump… and he would say they’re cheating."
Schlossberg added, “I wouldn’t call it a weapon but it is the ultimately policy tool to enrage Trump.” He said the technical resistance area is 6.60. The remnimbi was at 6.54 Monday.
"I'm surprised it hasn't gotten a tweet already," said Sinche, a reference to the president's penchant for using social media.
China has a fewmore likely responses, including its already announced plans to tariff U.S. goods and agriculture. The Chinese government could encourage boycotts of certain goods, or make life difficult for companies doing business in China with regulations. It could also buy fewer U.S. Treasurys.
Brown Brothers Brothers Harriman senior currency strategist Win Thin said he doubts China would resort to selling Treasurys. “That would be a double edged sword because they are the biggest holder of Treasurys. Selling Treasurys would be the nuclear option and nobody would gain,” he said.
Schlossberg said the increased trade threats made by Trump and the prospect the U.S. will announce further measures has hit the dollar. “A couple of weeks ago, the market was feeling terrific about the economy and feeling strong about the Fed and feeling like we’re going to go ahead on this growth path,” he said. Now, the trade issues are raising doubts about growth and whether the Fed can remain as hawkish as it is.
“I think that’s what the market is getting concerned about. The rhetoric is getting to higher and higher levels. Trump is known for pushing things to the limit and walking away from the edge. The big problem is the rest of the world has simply stopped trusting anything the administration has said,” Schlossberg said.