By Tom Westbrook and Alun John
SINGAPORE/LONDON (Reuters) – High-level talks in China about allowing its currency to weaken next year are underscoring the threat to investors and companies that big foreign exchange moves are coming. how US tariffs will shift global trade and money flows, analysts said.
Reuters reported on Wednesday that China was considering letting the yuan fall to weather what is likely to be a sharp increase in tariffs, citing people familiar with the matter. The yuan immediately fell against the dollar, along with currencies across Asia that are highly sensitive to Chinese demand. (FRX/)
Although a weaker yuan was expected, with pressure on the exchange rate since the election of Donald Trump as US president, it could be framed as a policy move that could mark the beginning of a new round of global price, trade and inter- cash flow.
“Currency adjustments are on the table as a tool to be used to reduce the impact of taxes. I think that's clear,” said Fred Neumann, chief Asia economist at HSBC in Hong Kong.
“Taking the currency weaker could be a signal to the rest of the world that China is having an exchange rate impact on imposing tariffs.” ”
A cheaper exchange rate helps exporters make their prices more competitive internationally.
The yuan fell about 0.3% and as much as 7.2803 to the dollar after the Reuters report. The Australian dollar, sensitive to moves in the yuan with its commodity exports, had touched a one-year low.
Trump has said he plans to impose a 10% universal tariff on imports to the US and a 60% tariff on Chinese goods.
Financial markets have been bracing for more volatility since it began on January 20, but have been unsure how seriously to take its threats.
Reuters spoke to three people familiar with the talks on allowing the yuan to weaken, one of whom said the central bank had considered a drop to around 7.5 to the dollar – about a 3.5% drop from the current rates around 7.25.
However, that is on the weaker end of investment bank expectations, adding to a sense among investors that China is determined to be better prepared for trade shocks this time around.
“If they have to revive the economy, and they tend to be more interested in focusing on exports, there is a strong logic that they could let the economy slow down,” Jane Foley said. , head of currency strategy at Rabobank.
INTENSE, FAST
A troublesome factor for China is where any slippage would leave the yuan against non-dollar currencies, particularly in Asia where many neighbors such as Vietnam have become hubs for the end of Chinese manufactured goods and sanctions. to avoid the US.
Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments, said he expects China to stage a controlled and gradual devaluation but “Asian currencies are likely to change, especially currencies economies that are driven by exports, in conjunction with the forward yuan. a trade-based foundation.”
Chinese exporters have been hoarding dollars with an eye on the 7.5 level as a point to start selling, but they have also been looking for ways to avoid currency risks altogether by invoicing in yuan and other such areas of work – especially since the yuan has received this. year on peers.
“If China aggressively lowers the currency, it raises the risk of a cascade of tariffs,” HSBC's Neumann said, if it prompts other economies to raise their own tariffs to protect their industrial base from Chinese imports. is very cheap.
“This could lead to a backlash among other trading partners, which is not in China's interest.”
To be sure, much of the risk is in the speed or shock value of any move in the US, and some market participants do not expect Trump to be in a hurry to take direct action.
“Some voices in markets are calling for a rapid devaluation of 10-20% (in the yuan) to help offset the tariffs,” said ING China economist Lynn Song.
“We do not expect such a deliberate and deliberate devaluation because it will be ineffective to oppose tariffs, as this could easily be classified by the U.S. as a currency manipulation and as a result of an increase in tariffs.”
However, at recent analyst briefings in Singapore, Trump's trade policy was seen as a real wild card and the Chinese currency was weaker than the consensus for analysts at Nomura and MUFG.
“My view is that FX flexibility will come through,” said Craig Chan, head of global currency strategy at Nomura, ahead of a Reuters report on forex talks in China.
He recommended a few long dollar positions in Asia.
“It's long dollar/CNH one. We have a target of 7.60 by the end of May. It could be intense, it could be fast,” he said. “That would obviously be a threat to the dollar/China – moving higher, faster.” “
And at MUFG, a forecast for a drop to 7.5 per dollar depended on the assumption of an average price of 40% on Chinese goods.
“A 60% tariff on China's products would require a 10%-12% yuan depreciation against the dollar (from September) to 7.8 or later … all else being equal,” said a source. – MUFG analysis.
During Trump's first term as president, the yuan weakened more than 12% against the dollar in a series of tit-for-tat tariff announcements between March 2018 and May 2020.
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