US Labels China A Currency Manipulator

Treasury Statement

Tensions between the US and China have continued to erupt this week.

President Trump unexpectedly announced fresh 10% tariffs on a further $300 billion of Chinese goods, due to start September 1^st. Following this, the US Treasury has now labeled China as a “currency manipulator”.

The accusation comes in the wake of the sharp weakening of CNH on Monday. This saw USDCNH trading up through the 7 level for the first time since the GFC in 2008.

The Treasury’s statement marks a follow through on Trump’s consistent threats to reinstate the ‘currency manipulator’ label, which has not been applied since 1994. The Treasury said that China had artificially weakened CNH against USD to gain “an unfair competitive advantage in international trade”.

Ahead of the US Treasury’s official statement, Trump took to Twitter, as usual, to criticize China, writing:

China Responds

However, China has immediately responded and firmly rejected the accusation. The People’s Bank of China said in a statement released yesterday:

 “The United States disregards the facts and unreasonably affixes China with the label of ‘currency manipulators,’ which is a behavior that harms others and oneself…The Chinese side firmly opposes this.”

The statement continued, with the PBoC saying that such a move by the US will not only “seriously undermine the international financial order, but also trigger financial market turmoil. It will also greatly hinder international trade and the global economic recovery, and ultimately will suffer from it.”

US To Pursue IMF Decision

While the US will now make a case to the International Monetary Fund following its accusation, the claim is unlikely to lead to any formal penalties. The accusation is more symbolic than anything.

China has clearly been highly insulted by the move. Further comments in the statement from the PBoC noted:

“This unilateral act of the United States also undermines the global multilateral consensus on exchange rate issues and has a serious negative impact on the stable operation of the international monetary system… The Chinese side advises the U.S. to leap over the cliffs and return to the correct track of rationality.”

Trade Deal Hopes in Tatters

This latest escalation in tensions has cast further doubt on the likelihood of a trade deal. While a further round of trade talks is scheduled for September, it seems increasingly likely that these talks will be abandoned.

Goldman Sachs: No Trade Deal Until 2020

In a research note released this week, Goldman Sachs advised clients that it now no longer expected the US and China to deliver a trade deal before 2020.

In the note, the leading US investment bank said:

“While we had previously assumed that President Trump would see making a deal as more advantageous to his 2020 re-election prospects, we are now less confident that this is his view,”

Goldman Sachs: Fed to Cut Again

Commenting on the implications of Fed monetary policy, the note said that the Fed was “increasingly responsive” to trade war risks. It added:

“In light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit, we now expect a third 25bp (basis point) rate cut in October, for a total of 75bp of cuts,”

Technical Perspective

For now, USDCNH remains near the middle of the range between the 7 level and the 7.1382 breakout highs. While above 7, focus remains on a further break higher though we are more likely to see a period of consolidation for now. Drifts back towards 7 should find buyers while any moves higher will likely meet offers into the new highs.