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Press release
05 Aug 2019

China weakens currency, adding more pressure on global trade

Nick Wall comments on the fall in the value of the renminbi against the US dollar.

 

The main driver of today’s selloff in risk assets is China’s decision to stop defending the renminbi against the US Dollar, with the currency falling below Rmb7 to the dollar for the first time since the global financial crisis. Holding this steady was seen as key if there was any chance of trade talks succeeding, but after President Trump decided to add tariffs to the remaining $300bn of imports, China has decided to let it go.

This has a lot of ramifications. Most obviously, it makes a trade deal unlikely any time soon, especially after it was reported that Chinese companies have been told to halt imports of US agricultural products. Secondly, it means more dollar strength hurting the rest of the world that has borrowed a lot in the reserve currency – the risks of a further dollar squeeze and more foreign exchange volatility are now quite high. Thirdly, it’s deflationary – China’s currency strength meant it was importing some of the rest of the world’s deflation. This puts even more onus on the US Federal Reserve (Fed) to ease policy to get the dollar down. The curve, trade and the dollar should be the key metrics the Fed looks at, not lagging domestic data. There are now 60 basis points of Fed rate cuts priced before year-end, I don’t think this will be enough.

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