The Long March for the Chinese Renminbi

US President Donald Trump and Chinese leader Xi Jinping have agreed to try to resolve the trade dispute over the next 90 days. Although a real deal is still a long way off, the financial markets are already celebrating.

The news of a trade war ceasefire sparked an enthusiastic response from financial markets. European stock indices opened more than 3% higher on Monday, December 2. The cyclical companies that depend on international trade (such as steel producers) saw the price rise even more.

This reaction calls to mind the comparison of fans eagerly running onto the pitch after the whistle. It is only a matter of time before investors realize that the whistle was the halftime signal rather than the closing signal.

Dig deep
Trump and Jinping agreed at the G20 summit in Argentina that they would not introduce any new trade measures for the next 90 days. That in itself is a stroke of luck, as both parties seemed to dig deeper and deeper in the run-up to the meeting.

As part of the agreement, the United States (US) will increase the import tariff at about $200 billion of Chinese goods will not increase from 1% to 10% as of January 25. On the other hand, China has pledged to buy a significant amount of US agricultural, industrial and other products.

90… 89… 88…
There are 2 reasons not to get too excited about the deal. In the first place, this is the short period in which both camps have to reach an agreement. For Trump, the fight is more focused on protecting the US's technological lead than on closing the current account deficit with China. For Jinping, technological progress is precisely the spearhead of its economic growth plans.

In view of the interruptions for the holidays (Christmas and Chinese New Year), it remains to be seen whether the parties will come out in the limited time. A second risk is that the truce is surrounded by ambiguities. China for example, did not say for what amount it will buy American items. The consequence of the lack of hard agreements is that 1 fierce tweet from Trump can put the trade conflict on edge again.

Long March for Renminbi
The price volatility of the Chinese renminbi underlines that much remains to be done before the trade conflict is resolved. The currency shot up more than 1% against the dollar. That was the largest increase since February 2016.

On the other hand, the exchange rate damage, which has flared up since the trade war, has only been erased after a price increase of another 10%. The Chinese renminbi still has a long way to go. But they know all about that in China.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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