Currency is a weapon in a trade war!

Si vis pacem, para bellum
(from lat. “If you want peace, get ready for war”)

– Latin popular saying, Cornelius Nepot.

This expression can be used to characterize the China’s behavior in the trade confrontation with the United States. The U.S. and China  trade tensions increase as October 2019 is coming soon. So, since October, the United States plans to increase duties on Chinese goods to 30%. To which China responded with mirror actions in the amount of 5-10% in the amount of $ 75 billion for American goods.

The rhetoric of the United States and China regarding trade confrontation softened despite the fact that between the United States and China the previous trade duties were maintained at the end of August. Given the fact that the White House has narrowed the list of taxable goods from China, omitting promises to tighten customs duties. Both parties are ready to engage in dialogue. But the highest degree of uncertainty in this matter remains. And for the market it is no longer a surprise that the rhetoric in trade talks can change completely from day to day.

Read: “The national currency exchange rate as an advantage in trade negotiations”

Currency as a control lever

China continues to prepare for a tougher trade war by depreciating the national currency (CNY) despite possible negotiations. Thus, the dynamics of the USD/CNY currency pair (US dollar/Chinese yuan) continues to grow, actively playing back all the aggravations in the trade confrontation. Also, this currency pair remains an adequate barometer of the US – China trade confrontation.

The weakening of the Chinese yuan against the US dollar remains an effective weapon in both the Chinese trade war against the US and an instrument of psychological pressure on the White House. Given the increase in duties by 10% on Chinese exports, this will be a direct reason for the growth of the USD/CNY pair to new multi-year highs of 7.300, 7.400 and 7.500.

So far, the strengthening of the dollar against the Chinese yuan remains an instrument of manipulation in trade negotiations and is limited to resistance levels: 7,200, 7,250 and 7,300 in case of exacerbation of tension. Support is located at levels: 7.100 and 7.000.

Fig. USD/CNY chart (blue line – US dollar index)

But it is also worth to note the inverse correlation between the USD/CNY pair and the US dollar index, no matter how strange it sounds. Strengthening USD/CNY is directly dependent on growing risks in the trade war. At the same time, the risks of a trade war put pressure on the American dollar and his decline against a basket of major world currencies, especially against the safe haven currencies.

Anton Hanzenko