Donald Trump lost his patience entirely on Monday evening, branding China a currency manipulator after a day likely spent glued to Fox Business watching the Dow plunge by more than 900 points at the lows.
The decision to make official what Trump says all the time on Twitter is yet another extraordinary escalation in what now looks set to spiral into an all-out global currency war.
The real irony will be when Trump instructs Steve Mnuchin to intervene in the FX market to bring down the dollar, thereby making the US a “manipulator” too.
In any event, Trump’s main gripe with the yuan (and the euro and the yen and the [fill in the blank]) is that currency weakness from America’s trade partners makes it more difficult for the administration to squeeze the rest of the world with tariffs.
As ever, the whole charade is maddeningly circular. The threat of tariffs (and their imposition) prompts currency weakness as the market anticipates a hit to growth and a monetary policy response. Trump then points to that weakness as evidence of “manipulation” despite having played a role in causing it both actively (by hitting other countries with tariffs, thereby denting their growth prospects and raising the odds of looser monetary policy in other locales) and passively (by juicing the US economy with fiscal stimulus, thereby exacerbating the divergence between the economic fortunes of America and its trading partners).
Around this time last year, it was readily apparent that an acute bout of yuan weakness had effectively offset US tariffs, in some cases before they were even implemented. Now, we’re back in the same situation, asking ourselves how far the yuan needs to fall in order to preempt the next prospective round of duties from “Tariff Man”. BofA has done that math.
“The far right column shows the actual USD/CNY rate relative to the implied level of USD/CNY required to offset tariffs”, the bank writes, describing the table below which appears in a Tuesday note.
“What is interesting is that the actual rate of CNY in markets was weaker (above 6.8) than that required to offset the tariffs until May this year when Trump raised tariffs to 25% on USD200bn of Chinese goods, which implied a USD/CNY7.00 required to offset the tariffs”, the bank’s Asia FX team goes on to say.
In other words, China held back during the May escalation in hopes that things would calm down. But, last week’s threat was the straw that broke the camel’s back.
“The latest September 1st tariff announced ratcheted this implied rate to 7.34 and may have tipped the balance for Chinese policy makers to sanction a move above 7.00”, BofA says.
The two simple takeaways from the table above are that if Trump goes ahead with a 10% tariff on the remaining $300 billion in Chinese imports on September 1, the yuan needs to fall to 7.34 to offset those levies.
If Trump goes “all-in” and slaps 25% levies on those goods, the yuan needs to drop all the way to 7.87. If Monday was any indication, markets will be in for a world of hurt if Beijing countenances that kind of shock devaluation.
Oh, and don’t forget that last week, Trump casually suggested that 25% is not, in fact, “all-in”. Apparently, he’s at least considered going even further than that. One shudders to think what that would entail.