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How Currency Selloffs Could Make The Trade War A Whole Lot Worse?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

trade-war

The PBOC set the Yuan’s daily fix at 7.0039 today, slightly below the psychological level of 7 that analysts see as indicative of further yuan depreciation. This is the first time the PBOC has set the yuan’s fix below 7 since 2008 when a global financial crisis caused a selloff in emerging market currencies and China’s economy was a fraction of its current size. While this is not entirely unexpected, with the fix above market expectations, it indicates that the PBOC is comfortable with the currency trading below 7 and increases the possibility of further US retaliation. The event has not yet caused a significant market sell-off, surprising many analysts and indicating that investors are looking to the US for a response before taking further action.

Following Trump’s decision to label China as a currency manipulator, the Yuan has become front and centre of the US/ China trade war. Analysts are fearful that the trade war could evolve into a far more damaging currency war if the situation were to deteriorate. Trump is opposed to an artificially low Yuan, as he believes it will give Chinese producers a cost advantage in trade with the US.

China’s currency has been artificially held up thus far by PBOC intervention, whilst also being supported by a large trade surplus with the United States. China’s trade surplus with the US is rapidly declining as tariff hikes take effect, increasing the chance that the yuan will depreciate further. Nevertheless, the Chinese government has demonstrated a willingness to prevent panic in currency markets, signalling a willingness to prevent a sudden, short term currency depreciation. Unlike the bank of England in the early 90s and SE Asian countries in 1997, China has no chance of running out of FX reserves in the short term and can easily stabilise the currency if it chooses.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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