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My operating assumption (see the NYT story today) has long been that China will not front run the tariffs -- in part because they are likely to want to try to negotiate with President Trump.
The recent stability of the fix at 7.19/7.20 supports that hypothesis
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The challenge for China -- and for China it is really a choice, as the PBOC and the state banks have enough firepower to hold the line so long as the financial account is controlled -- is that the yuan is already weak v the dollar
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7.35 or so (CNY v USD) has the been the weak edge of the CNY's long-term band for both the post global financial crisis period and the post COVID period -- it was a level that the PBOC defended in 22, in most of 23 and the first part of 24 ...
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If there are actual tariffs, not just the threat of tariffs, I can easily see the band being reset -- though the weak side of the band would need to be defined either through a strong signal from a fixed fix or intervention.
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And all of this matters for the entire world, as one of the main impacts of a weaker yuan is that it helps China offset the impact of any tariffs on its trade with the US through higher exports to countries that themselves don't have tariffs ...
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Given that China's current policy settings require that it export to offset its unresolved domestic weakness, this poses huge issues for Europe and many others. Krugman's essay on this was very good imo.
For now at least China is holding the line
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Or shifting more of their $1.0-1.5T commodity import bill to CNY, and net settling the offshore CNY in Chinese goods & gold, sending gold/commodity ratio even higher (its up 4x in past 15 yrs.)
Donald Trump’s return to the White House is set to reshape US foreign policy, promising potentially radical shifts on multiple fronts as war and uncertainty grip parts of the world.
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Brad can you explain how, in a free floating currency exchange, these tariffs are supposed to work at all?
They pretty much HAVE to cause dollar to rise and Yuan to fall right, which negates whatever competitive advantage for US manufacturers they're supposed to achieve.
Why would the yuan depreciate? Ia the Fed going to continue to raise rates? Wouldn't that bankrupt the US government? And if the Fed eases, wouldn't there be a double whammy for inflation? Brad, stick to your lane. You do not understand markets
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