This is what US-China currency brinkmanship looks like – Deutsche Bank

Alan Ruskin, Macro strategist at Deutsche Bank, suggests that in this new world of business-like deal-making, previously settled matters can now be used as fresh bargaining chips, and there is some chance that the USD/China exchange rate is turned into a game of brinkmanship.

Key Quotes

“In an adversarial political environment, the greatest negotiating power for both the US and China, comes if the CNY weakens sharply further, which is the direction, the market is pressuring anyway.  And then the next question is: will it be China or the US that blinks first?”

“As US – China relations go through a period of reconsideration under the upcoming Trump administration it is very likely that the US dollar - China yuan exchange rate will be used as a political football -  it's just not obvious in which direction it will be kicked.”

“These are still early days to try understand the mind-set of the incoming Trump administration, but early tweets from the President-elect throw down a marker that this will not be ‘business as usual’.  Some observers are struggling to understand why Donald Trump has chosen to engage on what seemed a fairly settled diplomatic terrain surrounding the one China policy as it relates to Taiwan.  One way to understand this is perhaps from a business-negotiating standpoint.  Trump has clearly indicated the status quo is unacceptable.  That the US has the raw end of the stick, exporting jobs and technology to China, in exchange for more, if cheap, imports.  To negotiate change, it is arguable ‘everything’ will be laid out on the table and opened up for renegotiation.  In this new world of business like deal-making, previously settled matters can now be used as fresh bargaining chips.”

“For both the US and China, the greatest negotiating power comes if the CNY weakens sharply further.  The US and China likely experience maximum pain under the same weak China currency they could inflict on each other. The good news is that because a much weaker Chinese currency is disruptive for both countries it should, in theory, make it less likely.  The bad news is this is in the direction the market is pressuring anyway, which, in practice, makes it more likely.  In addition, in a business-like world where everything is up for renegotiation, there is some chance that this becomes a game of brinkmanship, ‘a currency game of chicken’ in the Chinese year of the fire rooster. And then the question is will it be China or the US that blink first?”

“A much weaker CNY, particularly one where there was a loss of control, is not in the US’s or China’s interests, which is precisely why it can be used as political bargaining chip by both sides.  The US is better placed to weather such a storm, not least because financial instability will have less-important political implications for the US than it does for China.”

“If the USD/China exchange rate becomes a political football, caught up in a broader refashioning of the US–China relationship, the danger is it is punted with the market grain, accelerating CNY weakness.”