China the Currency Manipulator, and So What?

Treasury’s determination that China is a currency manipulator is of little consequence, as the enabling law doesn’t confer any important new powers on Trump. But coming after a terrible day for markets, during which Trump inflamed the situation with tweets rather than offering the usual assurances, it shows that Trump no longer feels constrained to not scare markets, seeing them now as collateral damage in the process of scaring Xi. The risk of a currency crisis for China now echoes 2015 when RMB underwent a surprise devaluation, driving US stocks down more than 11% in a matter of days. At the moment it seems China is keeping the weakening of RMB orderly, which is what helped stocks find their footing in 2015. But Trump seems set on creating continuous headline risk – we expect something about Huawei will be next. Things will likely have to get worse before they get better – but the fright that will make them work is the same thing that will drive China to a deal.