According to Arjen van Dijkhuizen, senior economist at ABN AMRO, a new element in the re-escalation of the trade war has been the USD/CNY exchange rate breaking the 7 level, for the first time since 2008.
Key Quotes
“We have adjusted our USD-CNY forecasts down (for 2019 from 6.90 to 7.20 and for 2020 from 6.70 to 7.50). However, we have maintained our view that the People’s Bank of China (PBoC) would not tolerate a free fall of the yuan, as it learned lessons the hard way during the turbulence back in 2015-16. In that episode, capital outflows surged on sharp CNY depreciation expectations and Chinese FX reserves dropped by 25%.”
“All told, we now expect the PBoC will tolerate some more yuan weakness to preserve China’s competitiveness in the wake of higher tariffs, but will act to keep the depreciation modest. Developments over the past week lend support to this view.”
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