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NZ dollar rise against China's yuan amid escalating US/China trade tensions

Monday 13th May 2019

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The New Zealand dollar rose against China’s yuan as that country devalued its currency as part of its damage control in the wake of renewed trade hostilities with the United States.

The kiwi was trading at 4.5101 Chinese yuan at 5.15pm in Wellington from 4.907 at 8am.

The domestic currency was little changed against other major currencies, at 65.76 US cents from 65.80, but after peaking at 66.05 cents before the yuan’s devaluation. The trade-weighted index rose to 72.13 points from 72.03, again reflecting the change in the yuan’s value.

Last week, US President Donald Trump raised tariffs on Chinese imports and a Chinese delegation headed by Vice-Premier Liu He left Washington without a deal in sight.

Earlier today, the central parity rate of the yuan weakened 42 basis points against the US dollar – the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

“It’s lost 2 percent against the US dollar so far this month and we’re not even half way through the month,” says Peter Cavanaugh, the senior client advisor at Bancorp Treasury Services.

“Judging by the market pricing for the offshore yuan this afternoon, we could see a further devaluation of the official rate tomorrow,” Cavanaugh says.

China effectively runs two exchange rates, one inside China and the other outside it, often referred to as the renminbi.

On Friday, Trump raised tariffs on US$200 billion of Chinese goods from 10 percent to 25 percent. It is now threatening to impose 25 percent on an additional US$300 billion of Chinese goods.  

While Trump talks as if tariffs are paid to the US by China, his chief economic advisor, Larry Kudlow, told Fox News on the weekend that it is US consumers and companies that pay the impost.

Fox anchor Chris Wallace said to Kudlow: “It’s not China that pays tariffs. It’s the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers.”

Kudlow replied: “Fair enough. In fact, both sides will pay. Both sides will pay in these things.”

Upon further pressing from Wallace, Kudlow acknowledged that while China may suffer from the tariffs, it is in fact US businesses and consumers that have to pay for them.

Cavanaugh says that China is indirectly devaluating the yuan as a form of damage control to try to cushion the impact of the tariffs on its economy.

“But I don’t think there’s much the Chinese can do on the currency front. That will annoy the Americans more than they are already."

The New Zealand dollar was trading at 94.25 Australian dollars from 94.23, at 50.57 British pence from 50.69, at 58.58 euro cents from 58.62, and at 72.20 Japanese yen from 72.29.

The New Zealand two-year swap rate fell to 1.5936 percent from 1.6005 on Friday while the 10-year swap rate fell to 2.1050 percent from 2.1300.


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