Trump Decries ‘Major Violation’ As ‘Excessive’, ‘Abnormal’ FX Moves Presage All-Out Currency War

Donald Trump woke up on Monday to a sea of red across global equities and a dour read on Wall Street, thanks to the PBoC’s decision to let the yuan fall through the psychologically important 7 level.

This is, of course, a crisis of Trump’s own making. That is not a partisan statement. It is an objective assessment. His decision to tweet a new tariff threat last week (overruling Steve Mnuchin’s advice to warn Beijing ahead of time) was a bridge too far for China and now, they’ve seemingly weaponized the yuan.

“China dropped the price of their currency to an almost a historic low”, Trump observed on Monday morning. “It’s called “currency manipulation'”, he charged.

Read more: There Goes 7! Chinese Yuan Sinks To Record Low As Beijing Strikes Back

Actually, no. It’s not “called ‘currency manipulation'”. In fact, if the US president is looking for “manipulation”, he could point to the PBoC’s previous efforts to prevent the yuan from breaching the 7 threshold even when economic fundamentals and trade escalations would have probably pushed it there in the absence of official efforts to keep things calm. Just look at Friday’s fix, for instance.

What Monday is “called” is letting the currency go where the market wants to push it in light of recent events. Of course, Trump is never (ever) going to admit that his trade bombast is in part responsible for pushing the yuan weaker. It’s impossible to disentangle this situation. When the market starts to think that more tariffs are coming, the currency comes under pressure for two reasons: 1) everyone expects further economic weakness in China, and 2) the market anticipates looser monetary policy from the PBoC and, ultimately, a willingness to let the currency depreciate.

It’s a chicken-egg dilemma, and it sets the stage for the White House to “mistake” currency weakness tied to market expectations for “manipulation”. That phenomenon isn’t confined to the yuan, either.

In any case, you can expect much more FX balderdash from Trump as the week goes on.

His first order of business on Monday was to again command the Fed to cut rates. “Are you listening Federal Reserve?”, Trump asked.

Not to put too fine a point on it, but the chances of the Fed resorting to an inter-meeting rate cut (i.e., an emergency move between now and the September meeting) just because China is letting the yuan weaken is laughably far-fetched. The Yellen Fed didn’t do that in August of 2015 when things spiraled out of control. Rather, she waited until the September meeting and let it be known that liftoff was delayed in light of international developments.

So, given that Trump won’t get what he wants from the Fed before the September meeting, fears of intervention from Steve Mnuchin will rise. For weeks, markets have been on edge about the prospect of active intervention to bring down the dollar and Monday’s events would appear to raise the odds of that substantially.

Read the latest on the dollar intervention story in our currency wars archive

The issue for the Fed is that they will have to make a decision as to whether to match the Treasury in any intervention effort or risk Trump’s ire by refusing to go along. That latter option is probably a non-starter.

As a reminder, intervention used to be fairly common, but it what makes it unlikely to be successful this time around is the contentious environment, which means far from going along with any push to weaken the dollar, other countries are likely to push back.

And it’s not just the US. As noted on Sunday evening and again on Monday morning, Japan will soon have a decision to make. Tokyo cannot afford a disinflationary shock from a surging yen right now.

“The yuan free fall has reinvigorated the ‘worst fears’ of outright currency warfare across global central banks in ‘beggar thy neighbor’ fashion”, Nomura’s Charlie McElligott wrote Monday, flagging comments from Japan’s top currency official Yoshiki Takeuchi, who said he’s watching FX markets “with a sense of urgency”.

Meanwhile, South Korea’s FX authority called the USDKRW moves “excessive and abnormal”.

Trump closed out his first public statement on the yuan with an accusation. “This is a major violation”, he exclaimed.

And you can trust him on that. Because if there’s anybody who knows what it means to “violate” others in a “major” way, it’s Donald Trump.