Pound and yuan depreciation remain unchanged; the dollar-yen rate does not move no matter what happens [Nijiro Ota]
Profile of Jiro Ota
Jiro Ota. FX strategist. Began FX trading in 1979 at The First National Bank of Boston Tokyo Branch. Later worked in corporate FX trading at Manufacturers Hanover Trust Bank, BHF Bank, National Westminster Bank, and ING Bank, then moved to retail FX, worked in sales at GFT Tokyo, later gained experience as a market strategist, and is now active as an individual investor.
*This article is a reprint and revision of an article from FX攻略.com August 2019 issue. Please note that the market information in the main text may differ from the current market.
Unable to Break Free from Yuan Depreciation Amid Intensifying U.S.–China Trade Tensions
In order for President Trump of the United States and President Xi Jinping of China to maintain domestic authority, they cannot display a weak stance that invites internal criticism. As a result, expectations that the U.S.–China trade friction will be resolved quickly seem unlikely.
Looking back at the U.S. sanction tariffs initiated last year against China, the first batch in July last year imposed 25% on $34 billion, the second in August last year on $16 billion at 25%, the third in September last year on $200 billion at 10%, and in December last year the timing for the 25% increase was extended by six months. Although negotiations continued between the U.S. and China, no compromise could be found, and on May 10 this year the tariffs were raised from 10% to 25% as planned.
Then, on May 13, they announced the details of a fourth tranche of tariffs on all imports from China (up to 25% on $300 billion). The measures were expected to take effect after late June following hearings of industry opinions.
The U.S.–China saga over AI (artificial intelligence) technology remains intense. Last year, the United States banned trade with ZTE for supplying products to Iran and North Korea, severely crippling ZTE's business until the ban was lifted on July 13 last year, leading to serious financial distress.
Moreover, on May 15 this year, President Trump signed an executive order restricting the sale of telecommunications equipment such as Huawei within the United States, and on the 16th the U.S. Department of Commerce added Huawei and related companies to the Entity List, further complicating the outlook for U.S.–China trade frictions.
However, concerns about negative impacts on U.S. companies are strong, and considering the grace period until August 19 for existing networks and smartphone maintenance, it’s reasonable to infer that both sides would like to avoid the fourth tranche of tariffs. Both U.S. and Chinese leaders fear being perceived as having compromised, making a retreat difficult.
This time, conveniently, the G20 Summit will be held in Osaka on June 28–29 with both leaders in attendance, and recently President Trump said he would meet with President Xi Jinping and that it would be a fruitful discussion. There is a strong possibility that the timing of tariff impositions could be postponed to December at this summit.
Naturally, exchange rates are likely to move depending on whether the tariff impositions are postponed, but it is impossible to revert everything to the way it was. If delaying tariffs simply puts off the issue, the yuan might see a temporary rebound, but it would be difficult for the level to rise significantly.
