China's currency has been an important barometer of progress in US and Chinese trade talks, and right now it is noting well.
The question is whether the signal is intentional, and whether Chinese officials will go to prevent the yuan from reaching a key psychologically low of 7 to the dollar. That level has become a line in the sand for markets all over the world, and if it is destroyed, it can trigger a negative reaction in risk markets globally, as investors move at a higher economic impact from a longer and more controversial trade war. 19659002] Yuan has been quite stable this year, when the US and China conducted trade negotiations. But since President Donald Trump tweeted about new tariffs on May 5, the onshore yuan, or CNY, has lost 2.7% against the US dollar.
"It is obvious that the trade chef we are discussing now is a full blown trade war, so it is obviously a very serious scenario. Then we have this negotiation period, where it can be averted and it does not appear to be very good at all taken, says Jens Nordvig, CEO of Exante Data. "It is also unclear whether the Chinese officials want to fight hard to keep the currency stable. It is a question mark that came in today. "
The Ushore currency, or CNH, which trades in Hong Kong and is more affected by international traders, hit high at 6,945, while onshore yuan, more controlled by the central bank, was similar Over 6.91
It was also unclear whether it was an intentional act and Chinese officials responded on commercial tensions and the American act this week, Huawei telecommunications company blocks from buying US components.
A weaker yuan has been a source of friction between China and the United States for years. Intentionally weakening its currency and hurting the US as a result, if China allows its currency to weaken, exports will be more attractive, but strategies say Beijing will worry about capital flight and that will probably not risk it.
"The market is testing the central bank's promise to defend the 7-lever," said Marc Chandler, global market strategist at Bannockburn Global Forex. "They will do in some ways, partly through intervention, partly through the drainage of liquidity, and increase the cost of being short of the Chinese currency. They can do this on the domestic money market and on the domestic Hong Kong market."  Nordvig said the message the yuan sends is not like the positive comments about the trade negotiations that US officials like finance minister Steve Mnuchin or White House top economist Larry Kudlow have done.
"It seems that they are not even invited to China. If there are no calls in front of Trump and [President Xi Jinping] in Osaka, the meeting is binary and very risky," said Nordvig. to the G-20 meeting June 28.
"It would be very different if Mnuchin made any progress in some chapters here in the next few weeks. If that doesn't happen, we'll get close to the cliff, "said Nordvig. The question of whether Chinese officials should keep the currency up."
Strategies say that the current weakness of the yuan is due to a strengthening of the dollar and trade war problems, which in turn Chinese authorities are considering several monetary and fiscal policies.
"It sells on the expectations of simpler monetary policy and apparently no trade negotiations. China says we haven't invited the US back," says Chandler, adding that he expects the currency to challenge the 7-level soon.
"I think we have to test it. We will test Chinese solution. It will be more of a concern that there will be a bending point if CNY or CNH comes to 7. It will have a ripple effect on the markets. There will be another source of instability. Another rubicon has been crossed, "he said.
Adam Cole, head of the G-10 foreign exchange strategy at RBC, said that unnamed named Chinese officials said the PBOC would not allow the currency trading through 7 to suggest that such a move won It happened soon, but he said the yuan could break these levels in the future.
"Long-term, with the dollar generally approaching everything, I believe that the constraint will be unbound," said Cole, dealing with monetary policy positioning, morbidity and the fact that the US economy looks stronger than the rest of the world
China has reduced its holdings of Treasury, as some say may be a warning to the United States, but Cole said he did not believe that China, the largest Treasury holder, would bail out of the market in a big way.
"It's an ongoing concern. Like most people, we believe the risk of China going through a sudden liquidation, and the allocation of Treasurys is unlikely. It would be a case of cutting your nose despite your face, given how much China had to lose, he said.