Against the background of increasing tension in trade relations between Beijing and Washington, the opinion is growing that "military actions" can spread to the foreign exchange market.
It is assumed that as compensation for US tariffs, China will begin to devalue the yuan and fold its portfolio of US government bonds.
Markets are now considering the mark of 7.0 for the pair USD/CNY as the extreme limit, which the Celestial Empire should not cross to avoid retaliation from the United States both in the foreign exchange market and in the trade sphere.
The Chinese national currency is moving in this direction since the beginning of this month, the head of the White House, Donald Trump, announced an increase in duties on imported goods to America from China.
In recent months, the currency pair USD/CNY was in the range of 6.7-6.75. It is currently trading near the mark of 6.9. According to some estimates, to compensate for the new tariffs, the yuan should fall to $7.10.
Most analysts doubt that China will devalue the national currency in response to the new US tariffs, as this will not only cause a negative reaction from Washington but also accelerate the outflow of capital from China, as well as cause a serious blow to the efforts within the framework of the internationalization of the yuan.
Experts also reject the idea that Beijing will start selling US Treasury securities.
They proceed from the fact that any sale that affects the value of the US government debt will cause damage to China itself, since the remaining share of treasury bonds at its disposal will be cheaper.
In addition, even if the Celestial Empire begins to fold bonds, there will be no shortage of buyers, as the yield of 10-year treasuries over the past few months has decreased from 3 to 2.2%.
D. trump took the fall of the yuan as a manipulation of the exchange rate and as a sign that Beijing wants to conclude a trade deal with Washington.
"China will pump money into its economy and probably lower interest rates in order to compensate for the loss of its business. If the Federal Reserve retaliates, the game will be over, we will win!"- said the American President.
D. Trump would be happy if the Fed gave in to his pressure, lowered interest rates, resumed the program of asset repurchase, thereby reducing the value of the dollar.
Some analysts are now wondering whether Washington will raise and expand tariffs on Chinese imports if the USD/CNY pair crosses the mark of 7.0. In this scenario, the yuan could drop to $7.40, as the currency war should intensify as the trade conflict escalates.
At the end of last week, the US administration proposed a rule allowing the United States to automatically set tariffs for States suspected of manipulating exchange rates in order to obtain trade advantages.
The irony is that if the Fed does not go about D. Trump and will not adjust its policy, the dollar will come out of this conflict as a winner because it is being strengthened as an asset of a "safe haven". At the same time, currencies of emerging markets in a tandem with the yuan will fall in price.
The material has been provided by InstaForex Company - www.instaforex.com