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China is just getting started with using its currency as weapon in the trade war, analysts say

Key Points
  • The dollar reached a high of 7.0449 against the Chinese yuan onshore overnight, the highest level since March 2008.
  • "While we should not expect policymakers to be so explicit in their reasoning, markets are likely to take today's yuan trade as a signal from China that currency depreciation is on the table if push comes to shove with US tariffs," UBS said
  • "Our EM FX strategists now expect CNY to trade in the 7.1-7.2 range in H2 2019 and assign a low but rising probability of more gradual deprecation to the 7.5-7.7 range," Societe General said.
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The Chinese yuan could continue to fall against the dollar as China and the United States escalate their trade dispute, analysts said.

The dollar reached a high of 7.0449 against the Chinese yuan onshore overnight, the highest level since March 2008 and breaching the level of 7.0 that had previously been protected. The People's Bank of China said the country was not devaluing its currency and would adhere to the market-determined exchange rate system, but some analysts view the sharp shift in the exchange rate as another blow in the trade war.

"While we should not expect policymakers to be so explicit in their reasoning, markets are likely to take today's yuan trade as a signal from China that currency depreciation is on the table if push comes to shove with US tariffs," UBS said in a note on Monday morning. The firm predicted China allowing the yuan to weaken another 3% to 4%.

"Beijing is well aware of the costs of sharp depreciation, both in terms of outflow pressure and pressure from trading partners and Washington. In light of increased trade risks, we have shifted our USDCNY forecast to 7.2 over three and six months, and we do not rule out tests of 7.3 over this period," UBS added.

President Donald Trump accused China of manipulating its currency on Monday morning.

Societe General believes the yuan decline could be even greater.

"Our EM FX strategists now expect CNY to trade in the 7.1-7.2 range in H2 2019 and assign a low but rising probability of more gradual deprecation to the 7.5-7.7 range," Societe General said.

Trump announced last week that the U.S. would place a 10% tariff on an additional $300 billion of products imported from China, escalating the simmering trade war between the two countries.

Jens Nordvig, the founder of Exante Data, said on CNBC's "Squawk Box " he believes the Chinese central bank "ignited" the currency shift but also took some action to slow the slump in the yuan.

The U.S. Treasury could work to slow the falling yuan, but Nordvig said analysts believe it would take "a commitment to unlimited intervention" for U.S. counteraction to be effective against the Chinese.

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Key Points
  • "China dropped the price of their currency to an almost a historic low. It's called 'currency manipulation,' Trump says in a tweet.
  • Trump also takes aim at the Federal Reserve regarding China's currency slide.
  • China — which has historically controlled its currency — allowed the yuan to fall to its lowest level in more than a decade. The People's Bank of China denied devaluing the yuan as a counter to U.S. tariffs.
  • Trump's tweet comes four days after he announced a 10% tariff on an additional $300 billion in Chinese imports.