It will become increasingly difficult for U.S. and China to compromise on their ongoing trade dispute – TD Securities

Ned Rumpeltin, the European head of FX strategy at TD Securities, points out that in a surprise move, the US Treasury has designated China as a currency manipulator.

• “Given the deterioration in relations between the two countries in recent days, a further escalation was expected – particularly with USDCNH above the key 7.00 threshold. The question was what form that would take.
• The situation remains highly fluid and complex, but it appears China has opted for a more measured initial response. The official USDCNY "fixing" for Tuesday came in at a relatively tame 6.9683. We think the PBOC has broadcast its desire for a more restrained reaction in FX markets. This is, however, highly dependent on how developments evolve from here.
• That said, we do not see the light at the end of this tunnel. We are concerned that as we get deeper into a tit-for-tat cycle between these two governments. This suggests it will become increasingly difficult for both sides to back down and find room to compromise on their ongoing trade dispute. This, we think, could see markets continue to reprice for weaker global growth and rising political tensions.”