The White House is looking at a new approach regarding China from keeping the yuan soft to help exports. The plan is to designate currency manipulation as an unfair subsidy when employed by any country. The National Trade Council is trying to formulate a way to challenge China without singling them out specifically.
The new U.S. administration is wisely trying to keep relations with its largest trade partner in good standing. We’ve said before that the Trump administration should avoid direct accusations and it should use measured verbiage. Direct confrontations, a public war of words, and finger pointing over currency devaluation, helps no one. This U.S. strategy seems like a good tactical move which saves face for both sides and hopefully, can have the two sides working together. This should keep the yuan fairly stable in the short term.
The yuan should stabilize because traders and market participants will likely cease overreacting to moves from China. An improving economy will certainly help the yuan as fundamentals are always the most important factor in currency movements; however, they take time to take effect. Trump’s phone call to Xi, although not about currencies, also helped stabilize the yuan as it showed some positive communication between the leaders of the two biggest economies in the world.
Trump has shown a penchant for turning his campaign promises into reality with almost frightening haste. His early mentions of China as a currency manipulator seem to have been off the cuff. Monetary policies will sometimes drive a currency’s value down; however, its goal is economic stimulus, not manipulation.
China indeed may need to devalue its currency but our feeling is that market participants are much less likely to be surprised by this and some even expect it. When they devalued the last time, markets were caught by surprise and turmoil ensued. That will not be the case this time and although devaluation will certainly have market impact, we think global markets will be ready if and when it happens. Devaluation could spur President Trump to react but we think he’ll be less accusatory. Pointing fingers and creating more tension will not help remedy the situation.
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