Brief thread on chatter of a currency deal. Be skeptical. Be very skeptical. Here's why. Right now the RMB is fixed to the USD based upon essentially a math formula basket of currencies + noise. The noise function is generally a function of the preferred policy preference 1/n
of Beijing so it remains structural for extended periods of time above/below the pure math price. However, it stays close enough to the implied math price that nobody worries too much. Consequently, the recent fall in the RMB tracks pretty close with the rise in the USD. 2/n
Trump administration can complain about the impact of the falling RMB on imports and exports but that is pretty much just a function of the rising USD. Before everyone talks about tariffs impacting that price, worth noting that the USD price is against most major currencies 3/n
Direct Chinese US trade and RMBUSD trading is irrelevant in the direction of the global USD price. Irrelevant. Here is where we start getting into the politics. Any currency "deal" is likely to be worthless or short lived unless it is accompanied by real changes to 4/n
RMB exchange system, trade, and accompanying capital controls and flows (all incredibly unlikely). By that I mean this. Assume that the US and China release a statement that currency is included and they will work to keep the RMBUSD value within an acceptable range bla bla 5/n
This so called currency agreement is bound for failure. Period. Full. Stop. Any currency deal will have to be backed up by significant tangible mechanistic or capital changes. For instance: Beijing agrees to fix RMB at 6.75 and will defend at the price. There are a variety 6/n
of mechanistic changes that could be made but I see very low probability of any significant tangible change to the mechanics or flows because China is in an amazingly precarious position on FX. They don't have the USD, they aren't generating USD, and if they released 7/n
capital controls in full China would be bankrupt tomorrow. Leaks are already at their highest level in years. In short, any US China currency agreement is likely to be a big big fudge to paper things over because there simply isn't scope to make significant changes to the 8/n
mechanics of the existing currency flow and price setting mechanics. Except a worthless fudge a little likely or no currency agreement most likely. Done.
