RMB Breaks 7: Is this “the Edge of Chaos”?
RMB breaches 7, potentially opening the door to a currency crisis for China. The good news is that, for the US, a cheaper RMB offsets the contractionary and inflationary effects of the new tariffs; and for China, it insulates exporters from lost US business. But if capital flight catalyzes a disorderly recession in China, that would have seriously negative consequences for the global economy. Powell should be embarrassed for having identified trade uncertainty as a risk, and then taking out too little insurance. This is “the edge of chaos” where a deal can potentially get done, because it must – when any Chinese hopes of outlasting Trump until the 2020 election are made moot. Trump has deliberately made it unclear whether he wants a deal, or whether he sides with administration hawks who want to destroy China’s economy. Best guess: he’ll take a great deal, but not a good deal. The unknown is how far over the edge China has to fall before it offers one.