The Weaker Yuan: By Design Or Default? – August 12, 2019

The Weaker Yuan: By Design Or Default?

The yuan weakened to the critical 7 level against the U.S. dollar last week, and investors perceived this as a major step towards “weaponizing” the currency as retaliation for increased U.S. trade tariffs and restrictions. Among a range of critical investment issues, we examined China’s exchange rate policy and concluded that China was not on a devaluation path as part of its trade battle with the U.S. However, last week’s currency move was a clear signal that Beijing no longer sees the point in striving for a near-term truce with President Trump.

The implication of the escalation in the U.S./China trade battle, along with other politically-driven decisions in Asia and Europe that are undermining trade and business sector confidence, is that the case for a trough in global manufacturing activity has been significantly diminished. Worse, now the odds of contagion into the still-strong service and consumer sectors have increased.

Net: although we maintained a neutral stance on equities, a cut to underweight looms if the highly fluid trade situation continues to deteriorate.

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