China's currency fell to a near 11-month low against the dollar Wednesday, after the Trump administration fired off a new list of tariffs on $200 billion in Chinese goods.
China's currency has been sliding noticeably since mid-June after bumping around at higher levels from February through May. Since June 14, it has lost about 4 percent. China's currency has been a sore point for a number of U.S. administrations, which have blasted China for allowing the renminbi to weaken to help exports.
With the escalating trade war, market speculation points to the possibility that China will now use a weaker currency to fight the effect of tariffs.
The yuan, also called the renminbi, was at 6.67 per dollar Wednesday, falling about 0.6 percent. Last week, it hit a low of 6.72 percent. Nordvig said he does not expect it to reach a much lower level.
"I think when we get to 6.70/6.80, that's the top of the range we've defined," he said. "I think 2, 3, 4 percent lower. That would be commensurate with the trade shock we've seen," he said.
UBS Global Wealth Management also said Wednesday that the Chinese currency could weaken to 6.8 yuan per dollar.
The latest tariff announcement Tuesday evening was a surprise to the markets, following closely on a tit-for-tat round of tariffs last week, with China retaliating after the U.S. slapped 25 percent tariffs on $34 billion in goods.
"I think the [People's Bank of China] is playing the game with Trump," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. "The harder he pushes on tariffs, the lower they take the yuan to rebalance the cost relationship. They can offset some of the cost of tariffs because of the lower currency,."
"It's definitely a very passive aggressive move," Schlossberg said.
Nordvig said he does not expect China to let the currency fall that far. "Last week, they did some verbal intervention when the pace of depreciation was too fast," he said, noting China set its daily fixing just a little lower Wednesday.
"It was very neutral. So they didn't push back against depreciation," he said.
Strategists said China will not want to be seen letting the yuan sink intentionally, and one of its concerns would be triggering capital flight.
"I think they care to the extent that it starts to feed on itself. If it becomes a speculative frenzy and reignites capital flight, I think they'd intervene, but now it's kind of an organic move," Nordvig said, adding Russia has been a buyer of Chinese bonds.
China has previously tightened liquidity to squeeze the currency higher. "This is not happening at all this time around. This is surprising investors," Nordvig said. "Liquidity is very easy."
U.S. stocks sold off sharply Wednesday on the trade worries, after declines in global equities markets. Shanghai stocks lost 1.8 percent overnight.
"It's a pretty big deal. They are a very big export oriented economy. The reason we have this situation in the first place is they have a big trade surplus," said Nordvig. "They are vulnerable to this. It's going to hit profits of some of these companies. That's what you're seeing in the Chinese equity market. It's a pretty big deal, and we don't know where it ends."