British poet T.S. Eliot once wrote that “April is the cruellest month”. This April has certainly been cruel to those currency traders who were positioned for a further strengthening of the yuan against the US dollar. And May might not prove to be any better. Foreign exchanges seem to have concluded that there are not only good reasons to buy the US dollar but also specific reasons to sell the renminbi. The attractiveness of rising US Treasury yields accounts for much of the current allure of the US currency to investors. The US Treasury market is rapidly pricing in the likelihood that the Federal Reserve moves hard and fast to raise benchmark interest rates in an attempt to rein in US consumer price inflation that has reached levels not seen since 1981. The market’s expectations of larger, faster US rate increases could begin to be realised at the central bank’s next rate-setting meeting on May 3 and 4. Fed chief Jerome Powell acknowledged last week both that a possible increase of 0.5 per cent “will be on the table for the May meeting” and that there was some merit in the idea of “front-loading” any increases the Fed feels are needed. Additionally, pandemic- and Ukraine-related supply chain disruption , which has fed through into highly elevated US dollar-denominated food and energy prices, means purchasers worldwide need more US dollars with which to pay for their requirements. On the yuan side of the equation, and with China persevering with its zero-Covid policy , economic conditions in China still require supportive fiscal policy conditions and an accommodative monetary stance by the People’s Bank of China. By mid-April, the PBOC had paid Beijing 600 billion yuan (US$92.3 billion) from its profits, a move held to be equivalent to a reduction of 0.25 per cent in Chinese banks’ reserve requirement ratios (RRR). On April 15, effective from April 25, the PBOC announced an actual 25 basis-point drop in the RRR. The net effect of accommodative PBOC monetary policy and a hawkish Federal Reserve has been the compression of the nominal China-US benchmark 10-year bond yield differential that previously favoured yuan-denominated Chinese government bonds over US Treasuries. The absence of a yuan-supportive China-US yield differential removes a bulwark of support for the renminbi on foreign exchanges. Investors will also factor in that continuing Covid-19 containment-related disruption to China’s manufacturing output and the potential global economic ramifications arising from the war in Ukraine could prove a drag on Chinese exports in the coming months and, as such, erode another pillar of support for the yuan. ‘A variety of factors resonate’: China factory activity contracts sharply But there is another issue related to Russia’s invasion of Ukraine that bears consideration: the potential reaction of Western investors to China’s stance on the invasion. In response to Russia’s violation of Ukraine’s internationally recognised territorial integrity, many Western companies with factories in Russia or which sold into the Russian market have either halted operations or ceased exporting to the country. Such self-sanctioning reflects the abhorrence of those firms at the situation in Ukraine and is also a recognition that continuing to trade with Moscow as if nothing had happened was unfeasible from a reputational perspective. China continues to emphasise the “resilience” of its own ties to Russia while simultaneously trying to maintain a position of neutrality on Ukraine. As unpalatable as it might be to policymakers in the West, who overwhelmingly back Ukraine’s efforts to resist Russia’s invasion, China has the right to adopt a neutral stance if it so wishes. But that neutral stance comes with costs, particularly as public opinion in the West has evolved into a view that anyone who is not overtly pro-Ukraine could be suspected of being pro-Russia. The more that Western public opinion characterises China’s position as being pro-Russian in all but name, the greater the likelihood that Western investors could conclude that, from a reputational perspective, some degree of disinvestment from Chinese assets would make sense. This would consequently involve some disinvestment from the yuan. This is an unquantifiable risk but not an immaterial one, especially in when the unfolding market narrative already lends itself to a degree of renminbi weakness. April was cruel to those positioned for further yuan appreciation. May could follow a similar pattern. Neal Kimberley is a commentator on macroeconomics and financial markets