Is this Beijing’s first line of defense against Trump?

The onshore yuan has fallen to its weakest since November last year, with USD/CNY now rising to 7.29 today. The surge higher in the currency pair has really taken flight after the US election and even more so as Trump continues to threaten China with tariffs. And as that shrouds the outlook for next year, is China taking on an early response here?

There has been a line of thinking that Beijing could look to deliberately allow its currency to weaken in anticipation of the imminent trade war. This will help to enhance China’s exports i.e. make it cheaper. And one can argue that it works out both ways too. It would be futile for the PBOC to also burn through its reserves to try and limit yuan depreciation if there is mounting pressure amid a stronger dollar as well.

With the Chinese economy also struggling, it would be prudent for Beijing to undertake some form of safety/insurance measures before the Trump tariffs go into effect. That alongside further easing in monetary policy should help to offset some of the impact from the tariffs at least.

But in doing so, they risk hurting investor confidence as well as consumption activity i.e. domestic demand in these trying times. So, that will be something that policymakers need to consider when turning up this release valve for the moment.

This article was written by Justin Low at www.forexlive.com.