USD/CNY: Guided by US-China trade war – Danske Bank

According to Danske Bank analysts, the recent escalation in the trade war pushed USD/CNY above the psychological level of 7.0 on Monday and market participants are increasingly discussing if China is using the currency in the trade war.

Key Quotes

“Trump has little doubt about it when he tweets and overnight the US Treasury officially named China a currency manipulator. The move came outside the normal semi-annual updates. The labelling is primarily symbolic given the new tariffs already in place, but the move is certainly yet another escalation of the trade war and markets reacted negatively to the move.”

“However, importantly, the People's Bank of China did not let the yuan weaken further overnight and USD/CNY stabilised slightly above 7 this morning. China has been selling yuan-denominated bills and the mid-point for onshore trading was set a stronger level than expected this morning. The stronger yuan level has helped stabilise US equity futures.”

“Officially, the Chinese central bank says the weakening on Monday reflects market moves in light of the protectionist measures from the US. We argue that China will not pull the currency weapon as it could (1) backfire as capital outflow could accelerate, (2) China wants to be a reliable economic power in the global economy and (3) China will see a significant setback in its intention of moving towards a market-based currency. It does not mean that the CNY cannot weaken further, as we expect. In our view market flows point to a move towards 7.20 in 6M time.”