Trump tweets his frustrations with China's Yuan manipulation

• President Donald Trump latest Tweets amplify the likelihood of currency wars.
• All the foundations for an outright currency war are set, AUD/JPY in the limelight. 

President Donald Trump has been tweeting about China and the fix in the USD/CNY overnight above 6.9000, the weakest level since November 2018. The markets are preparing for currency wars which raises various possibilities from analysts and observers, calling for the likelihood of the Trump administration to intervene in the Fx market and break the March 2018 G20 Communique to refrain from competitive devaluations.

In a recent series of tweet's Trump said:

"China is intent on continuing to receive the hundreds of Billions of Dollars they have been taking from the U.S. with unfair trade practices and currency manipulation. So one-sided, it should have been stopped many years ago! 

Based on the historic currency manipulation by China, it is now even more obvious to everyone that Americans are not paying for the Tariffs – they are being paid for compliments of China, and the U.S. is taking in tens of Billions of Dollars! China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices. Not anymore!"

This is war

All the foundations for an outright currency war are set. The US started it and escalated things with their latest announcement of imposing further tariffs on Chinese imports and the Chinese retaliated by the banning of state imports of US agricultural products. 

Chief in Editor for the Global times also tweeted his thoughts on the matter earlier today:

"Based on what I know, in view of new tariff threat by the US side, the Chinese side has decided to suspend tariff exemption for US farms goods and Chinese enterprises have halted buying US farm products. The Chinese side won't submit to the US."

FX implications

The US administration has now pushed the Fed between a hard place and a rock, with markets now expecting far more of a chance of additional easing as soon as next month and more down the track. However, the Trump administration will likely want to see their 'competitors' punished for what Trump has said,

"China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games - as they have for many years!"

This could mean intervention from the US Treasury which might look to instruct the Fed to buy euros and sell USD/JPY as part of their strategic currency reserve management.  Currency wars will have a major impact for the wider spectrum of currencies, including higher-yielding exotics and risk-off currencies such as the Yen and CHF.  "The PBOC’s acceptance of USD/CNY above 7.00 has un-nerved investors further. Expect the safe-haven JPY and CHF to remain in demand and pro-cyclical currencies to stay under pressure. Only some surprise conciliatory wording on trade or the Fed surprises with more to offer in terms of easing can reverse this defensive risk environment," analysts at ING bank noted.

The highest correlated currency to the CNH has been the Aussie and lowest has been the yen, which makes for a compelling argument for shirt AUD/JPY. However, there will be bumps along the way, considering the Reserve Bank of Australia may be reluctant to cut rates too much too soon and the Japanese will seek to stabilise their own currency at these sorts of levels (jawboning is to be expected).