Much has been made of the potential impact of the US elections on currencies such as MXN and CAD. However, the US elections have the potential to also be a major driver for CNY in the context of broader US -China trade relations. Should Democratic candidate Clinton win the Presidency, this is likely to maintain the status quo between the US and China, specifically if she wins with a divided or Republican Congress. Should Clinton win the Presidency with a Democratic majority in Congress then there is the prospect of a stronger USD based on higher US growth and a less accommodative Fed. This would influence USDCNY though would is likely to be quite muted.
Written by James Harte
The outsider scenario, which is a Trump presidency, would have a much more significant effect on USDCNY. Trump has repeatedly declared his intention to impose a 45% import tariff on Chinese goods which could provoke a retaliation by the Chinese either through the imposition of their import tariffs or through the financial channel. This would likely be a negative situation for both countries. However, the likelihood of Trump pushing through with his extreme policies in the unlikely event of him winning the President is likely less than he conveys due to the sheer size of the Chinese economy.
Near Term Response
The immediate response to a Trump victory is likely to see USD strengthen except against JPY and EUR, as risk-off trading grips markets. This would probably see USDCNY rise though the magnitude of the increase would likely be less than that of other USD/EM pairs reflecting the partial offset from a stronger JPY and EUR and the ability of the PBoC to reduce the pass-through effect of a stronger USD.
Medium Term Response
One the near-term reaction subsides; the Yuan’s trajectory would likely be a consequence of Trump’s macro and foreign policies. Regarding macro policies Trump has advocated fiscal stimulus through lowered taxes and increased spending and supports a more hawkish monetary policy. Policies such as this could lead to an initial pickup in growth and inflation though their long-term sustainability is questionable. The total impact on broad USD strength is therefore not entirely clear.
However, Trump’s strong views on international trade could have very specific negative consequences for CNY. Trump has declared his intention to renegotiate NAFTA and impose a 35% tariff on imports from Mexico alongside a 45% tariff on imports from China whom he has repeatedly labeled a “currency manipulator.”
Though Trump’s 45% tariff is certainly extreme, the policy could be implemented and via two distinct mechanisms. First, the President could claim that trade with China has resulted in substantial and significant US balance of payments deficit or that China has carried out practices that are unjustifiable and unreasonable such as currency manipulation.
Should Trump succeed in implementing import tariffs, the adverse effects would extend inward to the US as well as outward to China. For the US it could prove challenging to replace many of the imports from China, certainly on short notice, and specifically in textiles and electronics for which China is the key global producer.
Various research studies such as those conducted by Moody’s suggest that even if the US could replace those vital imports, import prices would still rise ad create a burden for consumers and manufacturers. Ultimately Moody’s suggests that the US could enter a recession because of Trump’s proposed policies on tax, trade, and immigration.
Trade Conflict To Weaken CNY
A major trade conflict with the US would likely weaken CNY as a reduction in the Chinese trade surplus from the US would cause an FX supply/demand imbalance onshore which would likely affect corporates’ external debt repayments. FDI inflows could also be expected to slow amid manufacturing uncertainty, and there might also be outflows from the vast vault of retained earnings. Some believe that in the event of a deterioration of its balance of payments, China would have less incentive to defend its currency