The trade
war between the U.S. and China has dragged on for more than a year, and it’s starting to turn into a brewing currency war, said analysts.
The yuan
depreciated past 7 per dollar last week for the first time since the global
financial crisis of 2008, which prompted the U.S. Treasury Department to designate China as a currency
manipulator.
In a recent
report, the Bank of America (BofA) Merrill Lynch Global Research predicts what
might happen to the Chinese
yuan in three scenarios.
Scenario
1: A full blown trade war — the yuan depreciates 10%.
Chinese
imports from the U.S. are only a third of American imports from China, the bank
pointed out. This means that China cannot match the U.S. tariffs in terms of
quantity. However, one thing Beijing can do is to devalue the yuan by 10%,
canceling off the impact of a 10% tariff on Chinese goods, BofA Merrill Lynch
Global Research analysts said.
Scenario
2: A drawn out impasse — the yuan remains “unchanged.”
“In a
protracted impasse, RMB is likely to remain range bound, only because Beijing
would be wary of both angering the US by allowing the RMB to weaken or adding
even more headwinds facing Chinese exporters by allowing the RMB to
strengthen,” the bank said, referring to the yuan’s other name, the renminbi.
Scenario
3: An imminent trade deal: The yuan appreciates “modestly.”
In this
situation, the value of the yuan will go up but will be limited.
This is
because “any deal is likely to include stipulation that would limit the room
for any future RMB depreciation,” the bank explained. “If Beijing feels that
the downside for the RMB is limited, it is likely to want to limit the upside
for the RMB, especially if it thinks any RMB appreciation becomes difficult to
reverse politically.”
Winners and losers in
Asia
Weakness in the yuan
“essentially puts the brakes on” other currencies in the region, including the Indian rupee, Singapore dollar, Korean won, Malaysian ringgit and Indonesian rupiah, said Jameel Ahmad, global head of currency
strategy and market research at FXTM.
Amid the trade war, the
Korean won looks likely to be among the biggest losers as it “has been the most
preferred expression of deterioration in trade tensions,” wrote BofA Merrill
Lynch Global Research analysts in a recent note.
South Korean trade is
heavily dependent on China and the U.S., as the country is closely interlinked
in the supply chains between the two giants. The won has also been hit by the dispute with Japan, which has
spilled into trade between the two Asian neighbors.
The most resilient
currency among emerging markets in Asia is the Thai baht, the BofA Merrill Lynch analysts wrote.
Despite attempts by Thailand’s
central bank to weaken it, the baht has steadily strengthened — supported by
the country’s large trade surplus, among other factors.
U.S.-China trade tensions
have also affected economies elsewhere, and coupled with slowing growth
globally, it is encouraging countries to lean toward weaker currencies, Ahmad
warned.
“From many perspectives
it makes sense to prefer a cheap currency during uncertain times,” Ahmad told
CNBC in an email. “There is a global downturn taking place, and demand for
goods (or) services is at risk to weakness due to declining investment
confidence, with this encouraging the preference to have a cheap currency to
boost export competitiveness.”
A weaker currency makes
a country’s exports cheaper, causing them to be more attractive in
international markets.
Source: CNBC