Treasury secretary Steve Mnuchin has told CNBC that he’s closely monitoring the continuing weakening of the Chinese currency, the yuan. Mnuchin’s latest comments echo similar sentiments by president Trump, claiming that China and the EU are manipulating their currencies to gain a trading advantage over the U.S.
The yuan has weakened considerably against the greenback over the past three months, currently changing hands at 6.81 to the dollar as trade relations between the U.S. and China continue to deteriorate.
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The comments have come ahead of a big week for currency markets, featuring a flurry of crucial economic data and monetary policy meetings this week by the Fed, Bank of England and Bank of Japan. Related: Why Bitcoin Is Poised For A Breakout
The Bank of Japan ends a two-day meeting on Tuesday and the Fed concludes its meeting on Wednesday, while the Bank of England is expected to announce a rate hike on Thursday. Meanwhile, the European Central Bank reaffirmed last week that rates would remain low through the summer of 2019, which could hurt the euro. Euro zone inflation data is expected to come out on Monday or Tuesday.
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How Does China Manipulate the Yuan?
In 2016, the Chinese renminbi currency (also known as the “yuan”) joined the elite club after the IMF added it to one of its baskets of reserve currencies, thus placing it on an equal footing with the dollar, euro, British pound and Japanese yen. The new designation was an official vote of confidence that the yuan is a reliable and legitimate currency that should be accepted everywhere.
Experts hoped that this recognition would diminish the tendency to manipulate the currency by the Beijing government since it was under closer scrutiny and not entirely under the thumb of the Chinese government.
Currency manipulation here means using one currency to buy huge amounts of other foreign currencies in a bid to keep it comparatively cheaper. For instance, The Economic Policy Institute estimates that China spent more than half a trillion dollars purchasing foreign currencies in 2013. This works in China’s favor by boosting the relative value of its exports.
And the effect can be pretty dramatic.
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In a recent client note, Goldman Sachs argued that the recent declines in the yuan on a trade-weighted basis are significant enough to blunt Trump’s massive tariffs on imports from China currently valued at around $250 billion.
Goldman estimates that the slump could boost China’s GDP by about 40-50 basis points, enough to offset the tariffs. A 10-percent drop in the yuan against a basket of leading currencies could boost export growth by six basis points and add 80 basis points to GDP.
Weakening the yuan is a pretty attractive tradeoff for Beijing because it can boost growth without creating large inflationary pressures. Potential policy considerations though may restrain the scope for further depreciation.
Technical Analysis
Dollar net long positions have reached their highest point for several months.
Major currencies seem stuck in a familiar range as investors shy away from taking out big positions. The USD/CNH(offshore yuan) charts are showing bearish divergence of the daily relative strength index (RSI), suggesting that it could fall back to an expanding channel support at 6.7275.
Depending on how the week’s economic events unfold, a bullish breakout would signal a continuation of the rally from the July low of 6.5999 and possibly open the door to 7.00.
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Source: FX Street
By Alex Kimani for Safehaven.com
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