- USD/CNY approaches 7.40 as the Yuan continues to weaken against the greenback.
- The trade situation between China and the U.S continues to deteriorate.
- Emerging markets may feel the heat of the trade war.
Two of the biggest global superpowers, China and the U.S, have been stuck in a lengthy trade dispute, which has significantly affected the USD/CNY exchange rate. Analysts fear that the Yuan may weaken to as low as 7.40 yuan per U.S dollar as the trade tensions prevail or even escalate. Numerous factors could contribute to a weaker Yuan, such as recent Chinese protests over Hong Kong’s proposed national security bill.
The U.S is also threatening to slap China with sanctions, and this could hurt the Chinese economy. Investors are also aware of this, and thus the Yuan may experience lower trading volumes, thus paving way for the U.S dollar’s rally. The number of investors shorting the Yuan has increased to 8-month highs, and this has indeed contributed to the Yuan’s weak performance.
Investors may also be worried about China’s economic performance. The country’s economic growth is currently in the slowest that it has been for the past 8-years, especially due to the coronavirus pandemic. Goldman Sachs expects the Chinese economy to contract by at least 45% in Q2. The fate of the USD/CNY exchange rate depends heavily on the direction that the trade dispute will take and the measures that China will implement to support its economy.
More economic fallout could come from the China-U.S trade war
Economists have expressed concerns that the ongoing trade war between China and the U.S may cause a huge negative economic impact, especially on emerging markets. If the U.S imposes sanctions on China, this will affect trade with other countries. China is a major trading partner to many countries. Emerging markets, especially in Asia and Africa, benefit greatly from Chinese trade.
Sanctions would threaten the trade relationship between China and most of the emerging markets. This is a particularly bad time for two countries to be having trade-related tensions because economies are overly sensitive to such issues due to the coronavirus and its economic impact.