The US President-elect’s Twitter feed has revved up again forcing investors to further adjust. Just as Vice President-elect Pence was finally able to cool diplomatic tensions by minimizing Taiwan President Tsai Ing-Wen’s congratulatory phone call to Trump, the situation was enflamed by a late night tweeting session. The President-elect tweeted: “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into... their country (the U.S. doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!”.
The rhetoric has increased our expectations for Trump to brand China as a currency manipulator and to move forward with a 45% tariff on Chinese exports. Two narratives continue to evolve. The first being Trump’s aggressive stance and actions towards China (unlike optimism towards Russia) and the second, a basic disregard for diplomatic protocol. Both narratives will have significant ramifications in financial markets moving forward. RMB was basically unchanged from Friday’s FIX. Borrowing rates in Hong Kong for CNH continue to surge higher. Given the mounting worries over a US-China trade war, heavy selling of RMB should be expected. We suspect that the PBoC is intervening to increase the overnight borrowing rate in order to discourage further RBM liquidations. Overnight, CNH-HIBOR rates surged to 12.4%, levels not seen since Sept/Oct. As for USDCNY, watch for stabilization and even appreciation, as China who is worried about optics, will deflect exchange rate criticism heading towards Jan 20th. In broader EM terms, outflows have slowed after two weeks of large rotation from EM into DM funds. In a contrarian trade we would go short USDCNY heading towards Jan 20th.