Market awaits response from China - Westpac

Market awaits response from China to the latest US consideration of tariffs on additional USD100bn worth of China imports, points out Frances Cheung, Research Analyst at Westpac.

Key Quotes

“China imported USD155bn of goods from the US in 2017, just around the amount that has been so far announced by the US in consideration of imposing tariffs on. It is getting less flexible for China to match US action on tariffs, and hence various options may be explored, including measures on other bilateral flows.”

“China is unlikely to target a certain level of the CNY as a response to the trade conflicts as yet, when other options are not exhausted. A stable yuan, with fluctuations driven by market forces, is in China’s interest. It helps promote foreign appetite in yuan assets. The CNY has been fixed at fairly neutral levels compared with basket move in recent sessions. USD/CNY is likely to continue hovering around the 23.6% retracement of 6.3105.”

“A stable yuan will also help anchor regional currencies and mitigate any weakening move. That said, the development on the trade front remains fluid. Asian FX are affected mainly via the sentiment channel, but there is also concern on the potential implications on supply-chain related trade flows in the region. Taiwan and Korea have high exposure to China demand, and are much involved in the supply chain in China’s manufacturing process. The KRW may be suffering from a double whammy as it is also relatively sensitive to the change in risk sentiment.”