A weak yuan will help strengthen China’s coronavirus-battered economy, but only for now, reports the South China Morning Post. “China’s economy is enjoying a big break from the weak renminbi – no bad thing when the nation’s struggling export industries need every bit of help they can get before global recovery finally gets going again.”
Key notes
The renminbi’s competitive advantage is unlikely to last long.
The renminbi’s weakness is simply the corollary of a strong dollar, inflated by safe-haven and flight-to-quality flows.
The worry for Beijing is whether the dollar’s two-year rally against the renminbi is any reliable guide to the future.
The dollar is clearly overvalued right now and looks due for a significant correction.
The election, on November 3, could be the trigger for major currency volatility.
President Donald Trump, who has been badgering the Federal Reserve to move US interest rates into negative territory, is one of the dollar’s biggest liabilities.
Negative interest rates can’t be ruled out at some stage and could prove fatal for the dollar’s rally. A 10 to 15 per cent dollar retracement could be on the cards over the medium term.
A stronger renminbi could even be good news for China.
A more hands-off, freely floating currency could defuse tensions with Washington if it leads to a more level playing field for international trade.
Beijing would be extremely dismayed to see a return to dollar/renminbi lows around the 6.25 mark, last seen two years ago.
Market implications
Chinese Policymakers have been choosing currency stability over export competitiveness. Official Chinese data indicated that the economic damage from the virus was heavily concentrated in January and February, followed by a sharp rebound in March. Should activity continue to pick up, this should be beneficial for AUD as the USD falls away.
Share
