Renminbi sticking to well trodden path
We noted in “Renminbi depreciation true to form” (6 June 2019) that history was repeating itself, with the Renminbi NEER having weakened in April-June as it had done in May-July 2018, albeit at a more modest pace (see figure 1). This was a clear indication in our view that “Chinese policy-makers were once again using Renminbi depreciation as both a weapon in the trade war with the US and a tool to reflate the Chinese economy”.
Moreover, we argued that the risk near-term was that the Renminbi would weaken further and between 6 June and late-August the Renminbi NEER depreciated 2.7% to a five-year low – a similar pace of depreciation as recorded between mid-July and mid-October 2018.
The Renminbi NEER was then range-bound between late-August and early-October before making incremental gains in the second week of October on news of a thawing in US-China relations and progress made in negotiations in “Phase 1” of a bilateral trade agreement.
The Renminbi NEER appreciated a further 0.7% in the first week of November to within touching distance of an 14-week high as markets focused on the prospect of the US cancelling tariffs on $156bn of Chinese imports planned for 15th December and removing the 15% tariff it imposed on 1st September on about $125bn of Chinese imports.
It is notable that this modest rally was similar in magnitude to the up-tick in the Renminbi following President Trump’s announcement on 1st December 2018 that the US would delay a planned increase in tariffs on $200bn of Chinese imports to 25% from 10%.
However, the lack of tangible progress in US-China trade negotiations in the past week has seen the Renminbi NEER flat-line – as it did in the weeks following the US announcement on tariffs in early December 2018.
History suggests that if US-China trade negotiations stall in coming weeks the Renminbi NEER will continue to tread water, with a growing risk of it depreciating as the 15th December deadline approaches – a risk exacerbated by signs that Chinese economic growth remained weak in October by historical standards.
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Olivier is an economist, rates & FX strategist and entrepreneur with over 21 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.