“After vehemently protecting 7.0 in 2016, 2018, and 2019, onshore CNY has been finally allowed to trade above 7.0”, SocGen’s Jason Daw writes on Monday, marking what may go down in the annals of market history as a watershed moment, depending on how the Trump administration responds.
“Policymakers have the tools to stop CNY depreciating and it was solely their choice if it traded above 7.0”, Daw continues, noting that in his estimation, China “has probably determined that striking a deal with the US is unlikely and it is time to allow the RMB to fall to reflect fundamentals (weaker growth) and to dig in for a long-term stalemate”.
The important takeaway there is that Beijing made every effort to maintain stability in the interest of not irritating the US administration further, but last week’s broadside from Trump was a bridge too far.
Make no mistake, this is what’s in the driver’s seat on Monday across not just FX, but assets of all stripes. The yen’s surge, for instance, weighed heavily on Japanese equities, which suffered sizable losses for the second straight session.
Hong Kong shares were crushed (more here), and other regional benchmarks including South Korea’s beleaguered Kospi were hit hard too (South Korean equities are under siege from a slowing economy, jitters about the semi cycle and the worst diplomatic row between Seoul and Tokyo in decades).
Mainland equities in China will likely enjoy support from state buying, but Monday saw losses approaching 2% coming off the worst week for the CSI 300 since trade tensions were last on the boil in May.
EM FX will obviously be under immense pressure. SocGen’s Daw underscores that on Monday.
“Fundamentals coupled with the Fed disappointing and trade war tension rising could lead to a meltdown phase in EM FX”, he warns, adding that “there is probably more pain to come for EM currencies given the unwinding of carry trades (FX/FI), reductions in growth exposure (equities), and build up in speculative exposure”.
Suffice to say the “meltdown” phase may not be confined to EM if the yuan continues to fall and Trump responds by stoking currency war fears further.