US Increasingly Concerned About Recent Depreciation In China's Currency: Treasury

Last night, when commenting on the latest double whammy of Chinese economic data, which included both the biggest decline in Chinese FX reserves in 7 months, and Beijing's announcement of another 100bps required reserve rate cut, a step explicitly meant to ease financial conditions and - tangentially - devalue the Yuan even if the PBOC forcefully declared it was not engaging in devaluation, we noted that "the further the yuan drops the greater the offset to US import tariffs, and the more likely that the Trump administration will impose even greater sanctions in the future as it sees Chinese monetary policy as specifically targeted to undermine the impact of Trump's trade war including manipulating its currency."

We didn't have long to wait for this to be validated and moments ago, a Treasury official said that the U.S. is "concerned about the recent depreciation in China’s currency and is monitoring developments."

Speaking to the press, the TSY official also said that he is concerned about China’s turn away from market- oriented policies, and ominously warned that further details to come in Treasury’s FX policy report due the week of Oct. 14, where there is a modest possibility, if not probability, that the US could declare China a currency manipulator.

Commenting on the Treasury's statement, economists at ING said that while they don't see legal grounds to formally name China a currency manipulator, they "are on high alert for Trump 'currency manipulation' cries" ahead of the Treasury's FX report on Oct 14.

In kneejerk response the CNH spiked modestly, but has since retraced most gains as the market reads beyond the US jawboning.

What may be more concerning for the US Treasury is that 1-year yuan forward points have soared to 1,200 pips, another signal that traders see a much weaker yuan in the future.

The rate of appreciation in the forward curve this month, which has risen to 7.0472 today, is the quickest since June, when the U.S.-China trade war crossed the Rubicon, and now suggests that the PBOC's yuan "redline" of 7.00 vs the dollar will soon be crossed.