China’s Currency Crisis is Over... Yuan to Bet?
The Chinese yuan has stopped weakening, after a 4.1% drop during August – greater than the initial drop after the 2015 devaluation. Markets have responded with a risk-back-on posture that may mean the August panic will have been just another buy-the-dip opportunity. Maybe, but we think it won’t be that easy. New tariffs are in place, and more are coming, which can’t help but drive the yuan lower, with all the risk of an outright currency crisis that implies. It appears China did nothing to support RMB in August, which means it was willing to risk a crisis in order to offset the new tariffs. It is constructive that the Chinese team is coming to Washington in October for talks. An ironic unintended consequence of the Dudley editorial will have been to nudge the Fed toward easier policy, enabling Trump to play from greater strength against the China in October – as will a new trade deal with Japan, likely in his pocket by then. Trump will heap more pressure on China to drive a deal, which in order to be effective will have to expose markets to more risk.