As of August 2019, the Chinese yuan (CNY) now trades above 7.0 against the US dollar (USD), as the date for a new tariff on Chinese goods by the United States approaches. According to an analyst at the Bank of America, the yuan could trade at 7.5 against the greenback within a few months if China and the US do not find a resolution to the ongoing trade war. According to the trading charts, the USD/CNY pair reached a psychological level of 7 for the first time since the Global Economic Crisis in 2008, and it is clearly evident that this trade war, if not resolved, is going to impact the forex trading market.
Trade War Impacts Currencies
The yuan has been grabbing the headlines over the past few days in the forex landscape. The Chinese government has allowed the currency to reach the 7.0 mark against the US dollar for the first time in a decade, as they look to counter the fresh tariffs President Donald Trump is set to impose on Chinese products. The White House has accused Beijing of manipulating their currency in order to give them an advantage in trading.
Trump is looking to impose a 10% tariff on $300 billion of Chinese goods from the first day of September 2019. However, this could be a wrong move as it could see the USD/CNY pair reach the 7.5 by the end of the year, which is a lot weaker than the 6.63 earlier forecasted.
According to Rohit Garg, a currency and rates strategist at the Bank of America, the tariff reaching 25% could see the CNY surge past the 7.5 mark if the economic and financial conditions don’t change before the end of the year.
The Trade War Heats Up
The trade war between the US and China has escalated in recent weeks, and this has led most analysts to predict that President Trump will increase tariffs on all Chinese goods to 25%. According to Garg, hiking tariffs would further negatively affect market sentiments, and the U.S. Federal Reserve would then have to interfere in order to curb some of the resulting negativity.
Garg added that the Fed will become more dovish and will most likely decrease interest rates. If this happens, then the greenback will find it very hard to rally against the other leading currencies. While the two countries have been battling over trade and technology, the recent move by China indicates that the trade war is also affecting foreign exchange.
The Chinese government is also imposing similar tariffs on some United States products as they are committed to purchasing agricultural products from other countries aside from the US.
Trump’s Move Affects the USD Negatively
Despite intending otherwise, the US dollar is being affected adversely by the decisions of President Trump. He had earlier suggested that the US should also manipulate their currency, similar to what China and Europe are doing.
According to the chief economist at Singaporean bank DBS, Taimur Baig, Trump is strengthening the greenback against the CNY and a host of other currencies by ratcheting up the rhetoric and increasing tariffs on Chinese goods. The U.S. dollar index is up by 1.4% this year, which implies that the greenback has performed excellently against six other leading currencies.
Baig pointed out that the more Trump fights to give the US a competitive advantage, the more the USD becomes stronger. This is because investors push their funds into safe havens like the Treasury Bills, and this strengthens the currency.
He further added that while the Fed’s decision to cut interest rates and the White House intervening in the financial markets could help curtail the strength of the US Dollar, none of them will be as effective as the two countries ending the trade war. He stated that a resolution between China and the United States would lead to a smaller surplus between the two countries. However, Baig doesn’t see this happening. He pointed out that the latest move by China clearly indicates that the US is not in total control in this trade war and that Beijing can make it tough for Trump to weaken the greenback. Global investors are keeping a close watch on where this trade war will lead to next.
