How will US-China tensions impact USD/CNY?

US- China trade negotiation in Alaska.

We say this because the White House is on the verge of releasing a report into the origins of Covid-19 produced by its intelligence agencies. An earlier one produced in March concluded that it was impossible to tell if the pandemic stemmed from animals or a lab leak. That prompted US President Biden to ask for a new report in May to try to delve deeper, but hints suggest that the US intelligence agencies charged with compiling this latest report have come to the same conclusion.

We should know the full result very soon as Mr. Biden gave the agencies a three-month deadline in May to produce the findings. If the outcome is inconclusive again, that could be a shame for the US Administration as it might have welcomed the distraction of new US/Sino tensions to gloss over the plunge in the President’s poll rating over his handling of the crisis in Afghanistan. As it is, the President might just have to order another report until a clear conclusion is found. But the problem is that if this report, or a subsequent one finds that a lab leak is responsible, it will be accused of being biased as other attempts to get to the root cause of coronavirus have either been inconclusive or lent to the side of animal origins. Unless global opinion were to change about this, the Biden Administration would be on very thin ice if it were to punish China in any way for allegedly leaking the pandemic via a lab and then covering it up.

For financial markets, it looks as if the good news, for now at least, is that these cold war tensions between China and the US won’t flare up because of Covid-19. But this issue of wanting to apportion blame for the pandemic won’t go away and until China is ‘cleared’ of any lab leak, there is always the threat of sanctions in the future. This just adds to the tensions that have festered between the two countries and have not, as former President Trump claimed, dissolved since Biden took the keys of the White House.

Mr. Trump argued that Beijing was stalling in areas such as trade because it wanted him out of the White House and Mr. Biden to take over. But there’s been scant sign that Biden is going any easier on Beijing. Hence it looks as if this cold war will continue, even if it does not turn ‘hot’ via US Covid-related sanctions on China. This means that it will be a constant source of angst for the market, even if it is bubbling away below the surface as investors tackle the more pressing issues like inflation, Fed tightening, the Delta variant and more. Does this cold war have a bearing on the dollar/renminbi (CNY) rate, however it develops? If it turns much hotter, via US sanctions or something else, the dollar will likely strengthen as it usually does when global rise aversion rises.

However, we also have to remember that China is forging its own way, trying to make the CNY a conduit for more international transactions, such as trade invoicing, reserve holding and more. In short, some countries might be left with a choice of following the US or following China. Some have already made this choice it would seem, such as Russia thanks in part to US sanctions. But many others have yet to make such a decision. Of course, they may never have to; preferring instead to try to curry favour with both. But there is a danger that if a split emerges, the strides that China has made in internationalising its currency will increase and could have a bearing on the CNY. “While the CNY has stopped rising against the dollar this year as the greenback has rallied, it is at a five-year high in trade-weighted terms. This is a testament to the resilience of the currency and perhaps a sign that a cold war with the US is a spur to broader CNY strength, not weakness. It is one of the reasons why we see US dollar/CNY falling below 6.0 over the coming year against a market consensus of 6.40”, Mr. Steve Barrow, Head of Standard Bank G10 Strategt sresssed.