Talking Points:
- The China-US trade war intensified today after another round of 'tit-for-tat' tariffs was announced by the two countries to the tune of $16 billion each way.
- We've previously suggested that Chinese policymakers are willing to use the Chinese Yuan as a weapon in the trade war, and recent FX reserves figures support that assertion.
- Expect the trade war to remain in the headlines throughout August, spilling into the fall ahead of the US midterm elections.
See the DailyFX Trade War Infographic[1] for a visual history of the events that led to the US-China trade war.
The PBOC Doesn't Mind a Weakening Yuan
The latest round of FX reserves data for the People's Bank of China is out, and it would appear that a prominent theory about how Chinese policymakers are addressing the simmering trade war with the United States has gained credibility.
Two weeks ago, we asserted that the rampant appreciation by USD/CNH[2] since the end of March was a sign that Chinese policymakers were willing to allow the Chinese Yuan to depreciate[3] in order to blunt the impact of the Trump tariffs. Given the scale of the depreciation, we've argued that it is possible - even likely - that the impact of the tariffs would be negated simply by shifts in the USD/CNH exchange rate.
Earlier on Wednesday, the July batch of FX reserves figures for the PBOC showed a surprising lack of change. Typically, during times of stress on Chinese financial markets, the PBOC steps in to defend the Yuan from speculative forces from abroad. This translates into the PBOC burning through its FX reserve figures to 'defend' the currency.
But not
