My pre-holiday missive that FX volatility is making a comeback. Mr. Trump’s threat to slam tariffs on Chinese consumer goods earlier this month prompted the PBoC to step back and “allow” USDCNY to breach 7.0. This, in turn, drove the U.S. to label China as a currency manipulator. Markets now have to consider that the trade war are morphing into currency wars. This is significant for two reasons. First, it confirms what most punters already knew; the CNY is inclined to go lower if left alone by the PBoC. Secondly, it has brought us one step closer to the revelation of how far Mr. Trump is willing to go. The problem for the U.S. president is simple. He can bully his main trading partners with tariffs, “winning” the trade wars, but he is losing the currency wars in so far as goes as his desire for a weaker dollar. The veiled threat to print dollars and buy RMB assets, as part of the move to identify China as a manipulator, is a loose threat. Just to make it clear; it would involve the Fed printing dollars and buying Chinese government debt and/or stakes in SOEs, which would probably be politically contentious. Moreover, the PBoC could respond in kind; in fact, it probably would.
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Update 13/8/2019: The eagle-eyed comments on Seeking Alpha have noted that I messed up the sequence of the recent trade war escalation my original note. The correct sequence is/was: Threats to impose tariffs on consumer goods -> USDCNY above 7.0 -> China is labelled as a currency manipulator. It is corrected in the excerpt above, and in the PDF. Sorry for that mistake.