Modern wars are fought with precision tactics and tools like drones, targeted strikes, and heavy reconnaissance to identify where the enemy is weakest. But, as any military historian will tell you, wars used to involve far more blunt tools, like catapults and trebuchets, to inflict maximum damage on the enemy; friendly fire be damned.
With the growing US-China trade spat increasingly dominating the headlines (see “AUD/JPY: How FX traders will know that the “trade war” has started in earnest” and “USD: How does the Escalating Trade War Impact the Greenback?” for more on the topic), the markets have belatedly turned their focus to one of the original, blunt weapons of trade warfare: currency devaluation.
Over the last two weeks, the US dollar has rallied sharply against the Chinese yuan (here represented by CNH, the more liberally-traded “offshore” version of China’s currency). Framed another way, as certain US policymakers will no doubt play up, the CNH is now trading at its lowest level against the greenback of the year.
Indeed, the pair has now fallen for eleven consecutive sessions and is in the midst of its largest single-week rally since China’s devaluation of the yuan back in Q3 2015! From a trading perspective, today’s big rally may have bulls looking to target the 61.8% (6.7000) or 78.6% (6.8260) Fibonacci retracements next, though we hesitate to put too much stock into technical analysis on a currency that is not yet completely free-floating:
Source: TradingView, FOREX.com
So is this just the Chinese government’s attempt to make its exports more attractive and offset the looming round of US tariffs? While it’s tempting to believe so, there are multiple reasons why the notoriously measured and intentional Xi Regime would be hesitant to use the blunt “catapult” of currency devaluation unless it was absolutely necessary.
