Market Overview

26 May 2020

The Last China Currency Warning

The Chinese Yuan climbed close to the 2020 highs, resting at 7.14 Yuan vs the US Dollar amid US-China trade tensions that has been flared up by the US administration. The Yuan/Dollar rate serves as a mirror of US-Sino relations and acuity of the dispute between the two largest world economies. The situation with the Chinese currency exchange rate may bear rather political reasons behind it, a kind of the last warning from Chinese authorities to the United States and the rest of the world. The weakening of the Chinese currency may be treated like a shield against possible negative consequences of the trade war with the US. Currency exchange rate manipulation also acting as a cornerstone of the US-China Phase One agreement and, thus, it may flag the seriousness of the intensions of the Chinese government , even to dump a hardly reached trade compromise between the two nations.

Tensions between the US and China reemerged over accusations from the US authorities concerning the covering up of important information on the origin or spread of the COVID-19 infection by China. A newborn reason for the tensions to be intensified is the draft law proposal made by mainland China that could spell the effective end of Hong Kong's special status. This proposes renewed risks for further civil disorder in China, and could lead to sanctions from the US. The Phase One trade deal obtains another reason to be undermined. All these reasons may lead to another spin of a trade war with the US that is inopportunely in times of global economy crisis and joint efforts of all nations to restore economic growth worldwide.

However, the US President and his administration might think that sanctions and tariff pressure on China may help American corporations and score some points in the presidential elections’ race.

Significant weakening of the Yuan is traditionally badly considered by the US administration. Such a preventive move from China is a clear message to the US that it would not defer in the trade battle and resist any external pressure, and use every opportunity to support own exporters as well. Export has become the most important instrument to support the Chinese economic recovery from the economic downturn, caused by the COVID-19 virus. Retail sales in China in April declined by 7.5% year-on-year, import – by 10.2%. This data is reflecting a stagnation in the internal demand within China itself. Meanwhile, exports for the same month of April rose by 8.2%. In such conditions, China would do anything to keep export levels and to prevent any slump. The most easy way to do this is to weaken the national currency. This may compensate any tariffs imposed by the US. In case of any further deterioration of the US-Sino relations and further weakening of the Yuan to 2008 lows, the Chinese currency may go way deeper to the 7.186 mark.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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