China’s yuan has hopped onto the roller-coaster ride of US electoral politics and is now along for the ride.
Overnight on Tuesday the currency fell as much as 1.4% against the US dollar in offshore markets, as traders grappled with the possibility of another Trump term. The drop was the steepest since February 2018, when the opening volleys of the US-China trade war were fired by President Trump.
The currency then began to climb back as Joe Biden’s prospects improved in vote counts in Wisconsin and Michigan. By late Wednesday, it had recovered over by 0.9% to reach 6.62 USD.
Volatility in offshore yuan markets reflects certain political assumptions on the part of traders.
For one, it reflects the original assumption – shared by many within the United States media establishment – that Joseph Biden and the Democratic Party would secure a decisive victory in the election. When this didn’t come to pass in early results, traders responded by dumping their holdings.
The second assumption pertains to the China policy that is likely to be adopted by the two presidential candidates. Broadly, Trump is perceived as being more of a negative in terms of US-China relations, and Biden more of a positive. However, as recent articles on this website have highlighted, a more pro-China US policy should not be taken as a given in the event of a Biden presidency, especially over the medium-term.
The yuan has been on a hot streak since May 28, when it touched a yearly low of 7.16 USD. It has appreciated by around 6% since then. The reversal is fueled by China’s successful containment of the COVID-19 pandemic and the missteps of economic competitors in Europe and the United States, where fallout from the pandemic continues to stifle any and all attempts to return to economic normalcy.
Another factor behind the yuan’s recent strength is the gap between interest rates in the United States, where the Fed has slashed rates to insulate against COVID-19, and China, where the PBOC has set a rate of around 4%, which is drawing foreign capital to China.
The yuan is expected to appreciate further if and when Joseph Biden is declared a clear winner in the election, as the factors supporting its strength – COVID-19 missteps in the West and their resulting downward pressure on interest rates – are expected to persist, allowing China’s economy recovery to continue outstripping most of the developed world. And while the political priorities of the Chinese government remain opaque as ever, it would appear as though there’s still room for yuan to strengthen before approaching its historical redline of 6 USD.
Looking to the days ahead, the currency will be along for the ride in the unfolding US political drama, peaking or plummeting on the two candidates’ presidential prospects (and the PBOC’s daily reference rate).