Confirming the President's concerns, U.S. Treasury Secretary Steven Mnuchin issued a warning to China over the recent weakness of its yuan currency on Friday, telling Reuters that the Treasury is closely monitoring the yuan for signs of manipulation.
in an interview in Sao Paulo, Brazil, Mnuchin said:
“There’s no question that the weakening of the currency creates an unfair advantage for them," adding that "we’re going to very carefully review whether they have manipulated the currency."
While we have been hammering on the weakness in global FX (Yuan and Euro specifically) for weeks, this is a story that’s been under the radar but suddenly blew up in the last 24 hours.
It is key because, if Trump puts a 25% tariff on Chinese imports but China then devalues its currency 25%, then the net effect is zero. The impact of the devaluation offsets the impact of the tariff and then you’re back where you started.
This new currency war seems to be happening.
Now that Trump is focused on this, he’s likely to be infuriated and retaliate against China in the currency war and take steps to penalize China for currency manipulation over and above the existing tariffs and penalties for theft of intellectual property.
The crucial reason why this is important is because a critical date looms ahead of the midterms.
As James Rickards recently warned, this has a hard date of Oct. 15, 2018.
That’s the date of the U.S. Treasury’s semiannual report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.
That report is the formal mechanism for labeling a trading partner such as China a “currency manipulator” with severe consequences. Oct. 15, 2018, is just three weeks before the midterm elections, so it could be a highly popular political move in addition to being economically important.
All of this and more is on Trump’s policy plate right now. Just don’t expect him to handle it the way politicos usually do. Investors should expect dramatic policy shifts and extreme threats. But don’t overreact like the Washington pundits.