China unlikely to use CNY to retaliate against US tariffs - Citi

Citigroup’s strategists are out the latest research note arguing whether China will resort to using the Yuan in an effort to retaliate against the US trade tariffs.

Key Highlights via Reuters:

“An escalation to an outright trade war is plausible, but China is unlikely to use the Yuan to retaliate against the possible implementations of fresh tariffs.

China has spent over $1T of reserves to slow capital outflows, so it will be counter-productive to weaken the Yuan at a time when the Chinese are presumably jittery, just because of global trade issues.

Only China and the EU has the size to strike back in a way that could potentially harm the US economy in the event of any retaliation. Adding that while China has "reacted very cautiously", that could all change if Trump overreaches when further tariffs are implemented against China.

A global trade war would result in a selloff in global equities and US rates would fall. They note that the impact on the dollar is less clear but they say that emerging market FX will likely sell off due to risk aversion.

A weaker dollar against the G10 currencies will help to cushion that blow to emerging market FX - leading to only a small pullback if that were to materialise.”