Late last month, the US Treasury again declined to name China a currency manipulator, although at this point, the “official” word from Steve Mnuchin is irrelevant.
All that matters is Donald Trump’s tweets, which for years have featured allusions to and, in some cases, outright allegations of currency manipulation by America’s trading partners, including and especially the Chinese.
Last summer, Trump lamented that the relatively hawkish stance of the Fed was watering down the effect of his tariffs by underpinning the dollar. At the time, the yuan was in the midst of a steep decline. But it was hard to suggest that was due to “manipulation”. Rather, it was likely down to expectations that the trade war would weigh on the Chinese economy (thereby raising the odds of a hard landing) and that economic weakness would prompt looser monetary policy from the PBoC.
That underscored the quandary for Trump: How do you decide what’s “manipulation” and what’s market-based currency weakness? And if the trade war you started is the proximate cause of weakness in a trading partner’s currency, isn’t there something absurd about demanding other countries don’t ease policy to cushion the blow from the trade conflict? It’s one thing to expect other countries to bend the proverbial knee in a trade war, it’s another to ask them to shoot themselves in the foot by not adopting looser policy.
On Friday, in an interview with Bloomberg TV (which the network surely knew had the potential to move markets at a critical juncture), PBoC governor Yi Gang indicated that no one level on the yuan is any more important than the other. That suggests 7 is not, in fact, a line in the sand. Nor should it be, because as we (and others) have been keen to point out, defending a meaningless level only serves to reinforce the psychological importance of that level in the mind of the market, thereby creating unnecessary risks around a possible breach.
Yi’s comments came on a holiday for Chinese markets, which meant liquidity was thin. The predictable result was a spike in USDCNH.
Commenting further, Yi said that China has plenty of room to maneuver on monetary policy in the event the trade war worsens. “We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous”, Yi said, inadvertently employing one of Trump’s signature superlatives. Here’s the clip:
Got that? Or does Yi need to say “tremendous” another half-dozen times?
This represents yet another nod to the likelihood of more easing at a time when the Baoshang debacle already argues for vigilance when it comes to ensuring ample liquidity. The PBoC offered 500 billion yuan in MLF on Thursday in an effort to offset the liquidity squeeze from 463 billion in maturities.
Yi’s comments sent the offshore yuan tumbling to its weakest levels since November. After the initial spike higher in USDCNH, there was a sequel during the European morning which, again, probably has something to do with thin liquidity.
Last month, following the latest escalations in the trade war, Trump mused that if the Fed would just “match” the PBoC, it would be “game over we win”.
“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing”, Trump said, in the same tweets. At the time, the yuan had pushed up through 6.90 on tariff jitters. The weekly spike in implied vol. was among the largest since the devaluation.
On May 23, Wilbur Ross’s Commerce Department said it intends to “impose countervailing duties on countries that act to undervalue their currency relative to the dollar, resulting in a subsidy to their exports.” That move appeared to suggest that Trump has grown tired of Treasury’s technical studies and would prefer more discretion when it comes to punishing China when the yuan weakens.
Read more: Did The Trump Administration Just Announce A Major Currency Escalation?
Mnuchin is set to have a bilateral meeting with Yi at the G-20 Finance Ministerial. That should be interesting. Yi predicts it will be a “productive talk.”
You can be absolutely sure that the Trump administration will express alarm if and when the yuan does ultimately push through a 7 handle. The weaker the currency, the weaker the tariffs, all else equal. Yi’s comments to Bloomberg suggest that while the Fed might not be particularly excited about getting behind the White House in the trade war, the PBoC isn’t going to sit idly by and let Trump lay waste to China’s economy.
