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Macroscope
Opinion
Neal Kimberley
Neal Kimberley

Macroscope | Yuan appreciation might be the unintended consequence of interest-rate cuts in the US and Europe

  • Both the US dollar and the euro came under pressure after announcements by the Fed and European Central Bank chiefs that interest-rate cuts could be in the offing
  • If the Bank of Japan eases monetary policy further, the yen would be less attractive to currency investors

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A woman holds up renminbi and US dollar banknotes in Qionghai in south China’s Hainan province in January 2016. China would prefer that the renminbi does not appreciate strongly given the ongoing trade war with the US. Photo: Xinhua
Neal Kimberley
Not all currencies can weaken at the same time. Policymakers in Frankfurt, Tokyo and Washington look set to adopt looser monetary policy settings. Beijing might not necessarily welcome too much broad yuan appreciation when China is in a trade war with the United States but could find that the renminbi firms up by default. 
US dollar and euro weakness could result in some unwanted yuan appreciation against one or both of those currencies, and that’s even without factoring in the renminbi-supportive possibility that Beijing and Washington might – just might – make some progress on resolving the current China-US trade war.

The situation with regard to the yuan’s value versus the Japanese yen might be a little more complex, given the yen’s “safe haven” status in the currency space, but it would be logical for Japanese policymakers to follow if the European Central Bank (ECB) and the Federal Reserve do materially ease.

Early last week, the euro came under pressure on the foreign exchange market after ECB chief Mario Draghi told a conference in Portugal that the ECB would ease monetary policy again if inflation in the euro zone failed to pick up.

Even US President Donald Trump felt the need to comment. “Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA,” Trump tweeted last Tuesday. “They have been getting away with this for years, along with China and others.”
Mario Draghi, president of the European Central Bank, sits in the audience during a financial supervision conference at the new Prudential Supervisory Authority and Resolution building in Paris, France, on September 18, 2018. Draghi has said the ECB will consider easing monetary policy further if inflation in the euro zone failed to pick up. Photo: Bloomberg
Mario Draghi, president of the European Central Bank, sits in the audience during a financial supervision conference at the new Prudential Supervisory Authority and Resolution building in Paris, France, on September 18, 2018. Draghi has said the ECB will consider easing monetary policy further if inflation in the euro zone failed to pick up. Photo: Bloomberg
But what a difference a day makes. Just 24 hours after Trump’s tweet, the Federal Reserve signalled it would likely be cutting US interest rates this year. The US central bank removed its prior commitment to be “patient” before cutting rates. Unlike previous occasions, Fed chief Jerome Powell did not characterise weak inflation as being “transient”.
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