The big news on currencies right now is all in the Pacific, with threats of a currency war between China and the USA. The basics are this: the Chinese yuan has in the recent past always been below the level of 7 yuan to the US dollar. Early last week it slid to over 7. This makes Chinese exports cheaper, undoing some of the effects of the US tariffs on its exports (because the weaker your currency the cheaper your exports). It prompted the US to complain that China is a “currency manipulator”, which is a technical term laid out in the 2015 Trade Enforcement Act.
Technically, in fact, it seems that China isn’t a currency manipulator as it doesn’t meet all the criteria for that, and the Chinese claim that it is simply market forces, including a slowdown in the Chinese economy, doing the damage.
However, it could all the same lead to a currency war between the two. What would that look like? Each country would try to boost the other’s currency by buying up the other’s government and Treasury bonds. The problem with the US using a trade and currency war against the Chinese, or anyone else, is that the US dollar is exactly the safe haven that people run to in times of economic turbulence, which rather shoots President Trump’s fox.
It also means that if you have a transaction into USD in the near future, you shouldn’t expect the pound to strengthen significantly against it any time soon.
For the GBP/EUR, despite a strange hiccup over the weekend, the pound has strengthened this morning. To talk through the potential effects of the trade war on sterling, if any, and how it might effect your own currency transaction, do call your trader on 020 7898 0541.
