China Designated As Currency Manipulator By US Treasury

China Designated As Currency Manipulator By US Treasury
August 6, 2019

 

The US President Donald Trump’s decision to slap import duties on $300 billion worth of Chinese goods had a negative impact, as anticipated, on the Chinese yuan. However, the market was stunned when China’s central bank allowed the currency to break below the crucial level of 7. Against the greenback, the yuan fell by more than 1.6% to record a low of at 7.108, a level last seen in 2008. Notably, financial markets have turned volatile after China retaliated by asking its state-owned companies to shelve imports of US agricultural commodities.

For the first time in over a decade, China’s central bank allowed the yuan, which usually trades in a tight range, to fall below 7 per dollar. The People’s Bank of China (PBOC), which pegs the range of daily exchange rate of the yuan, explained that the currency is losing strength because of “unilateral and protectionist measures, as well as the expectation of additional tariffs on Chinese goods.”

Furthermore, PBOC justified the yuan’s decline by pointing out that the yuan has strengthened by roughly 20% against the dollar over the past two decades. However, the US may not be impressed with the explanation as devaluing the yuan would make Chinese exports cheaper and almost nullify the effect of tariffs.

Last Thursday, Trump tweeted that he will impose 10% import duty on most of the remaining goods which are imported from China.

Trump said “Trade talks are continuing, and during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country…We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”

Notably, Trump tweeted a day after the White House stated that the meetings with Chinese were conducive and that China would increase the purchase of agro products from the US. The next round of trade negotiations is set to begin in September.

Darin Friedrichs, senior Asia commodity analyst at Intl Fcstone, stated that Trump’s announcement “surprised the markets.”

Regarding the breach of 7 by the yuan, Julian Evans Pritchard, a currency analyst at Capital Economics, said: “The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US.”

Pritchard further stated that China has “effectively weaponized the exchange rate”

US officials have whined about the issue of weak yuan previously, but refrained from labeling China or any other country as a currency manipulator in May. However, yesterday, after 27 years, the US Treasury has labeled China as a currency manipulator, a decision that is likely to fuel the ongoing trade war.

Considering the PBOC’s justification about the yuan’s weakness, we can expect the USD/CNY pair to remain bullish in the short-term.

Technically, the USD/CNY pair is consolidating at 7.08009 after rising from a low of 6.9600. The stochastic RSI indicator is moving out of the bearish zone. As a result, we can expect the currency pair to move up in the short-term.

CNY - technical analysis - 6 Aug 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Janine

Janine

Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be


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