The offshore yuan tumbled to a new all-time low in early FX trading and USDCNH implied vol. rose, following White House officials’ “reinterpretation” of Donald Trump’s tariff comments delivered Sunday at the G-7 in France.
Asked by reporters if he had “second thoughts” about hiking the tariff rate on two tranches of Chinese goods late Friday following a horrendous day on Wall Street, the US president seemed to (somewhat sarcastically) suggest that he regretted the decision.
However, White House Press Secretary Stephanie Grisham quickly told the media the president’s comment “has been greatly misinterpreted”. If anything, Grisham said, Trump meant he regretted not raising the tariffs even higher. Larry Kudlow told CNN the same thing.
1-month riskies on the pair rose indicating increased demand for protection as the latest trade escalations raise the stakes and, presumably, the chances that Beijing countenances more currency depreciation to cushion the blow from the new tariffs.
The Aussie and the kiwi both fell amid the risk-off sentiment.
“It appears China is no longer confined to its commitment to be ‘the adult in the room'”, BofA wrote Sunday, adding that “while the PBoC may not want to see exchange rate expectations de-anchored, it may feel less obligated to use official FX reserves to support the yuan”.
All eyes will now turn to the the PBoC for the daily fix. Over the weekend, China voiced its displeasure at the Friday afternoon escalation and as we learned earlier this month, Beijing isn’t averse to sending a warning shot via the yuan, knowing they can rein it back in with stronger subsequent fixes.