A week ago, I wrote about how the tariff disputes the US is having with China and other nations is affecting the US dollar, causing it to increase in value relative to other currencies. Whenever there are higher risks of market shake-ups in global trade, investors tend to move their assets into haven currencies. The US dollar (USD), Japanese yen (JPY), and the Swiss franc (CHF), are all considered haven currencies.
Chinese policymakers have been controlling the fixed and spot rate yuan (CNY) spreads (this time) to encourage a weak renmimbi (RMB) as a sign of economic strength while trade disputes with the US have continued unabated. China does not have a free-floating currency like the USD and EUR, for example. Renmimbi is the name of the Chinese currency, and the yuan is the single trading unit. As a hypothetical comparison, it’s as if US currency was called “the US citizens’ money” and the US dollar was the single unit. However, the value of the yuan sharply fell 0.05% on Wednesday and traders are beginning to wonder whether this strategy is sustainable. Suppressing currency value is not without some cost and, if miscalculated, it can begin to affect domestic stocks and corporations who have issued bonds in US dollars and are required to service their interest and debt repayments. Bloomberg
All eyes are on July 6th, the day US trade tariffs on Chinese goods become enacted and whether the countries can reach an agreement before then. A weakened yuan can help to offset the costs of new tariffs on Chinese exports. The People’s Bank of China (PBOC) is cutting rates while the US Federal Reserve has plans raise them. It is difficult to say how competing policies between the world’s two largest economies will ultimately pan out. China has invested a lot of capital in emerging markets globally, which means many other countries could easily be affected through contagion. I hope to post new updates periodically for you to follow as claims of trade imbalance expands or contracts.