Trump Tariff Threat Has Yuan Traders Starting to Prep for Impact

Tania Chen and Robert Fullem
·2 min read
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(Bloomberg) -- Nine months before the US presidential election, Donald Trump is tiptoeing into the minds of China currency traders.

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With the former president seemingly a lock for the Republican nomination, investors are preparing for a possible return to the days of the US-China trade war which steamrolled the yuan during his term in office. Trump has suggested revoking China’s “most favored nation” status for US trade and hinted at tariffs of more than 60% on its goods.

During his term of office, Trump’s policies helped drive the yuan to what was its weakest in a decade in August 2019.

A gauge of the cost to hedge the Chinese currency which covers the Nov. 5 vote has climbed to the highest since 2017 relative to comparable periods. That’s the spread between nine-month implied volatility on the offshore yuan and its six-month counterpart.

“Jitters about the renminbi in the coming months are partly related to the possibility of another Trump presidency, which would mean more political and trade tension with China,” said Chi Lo, senior investment strategist for Asia-Pacific at BNP Paribas Asset Management. “Trump’s recent talk about levying 60% tariffs on Chinese imports underscore such worries.”

US election concerns are compounded by those about China’s domestic problems and measures to address them, which are also adding to the premium to hedge the yuan, according to Lo. Barring any assertive policy moves, “as long as such skepticism exists, the yuan exchange rate will be volatile,” he said.

Wall Street is already starting to game out the impact of Trump’s possible return to the White House, with many strategists suggesting it would bolster the dollar and push bond yields higher. Euro traders are also pushing up the price of hedging the common currency.

Of course it’s not just a potential Trump victory that could create shockwaves for the yuan. President Joe Biden’s administration kept Trump’s tariffs in place and the goal of curbing economic ties between the world’s two largest economies gained traction among some US lawmakers in December.

Still, it seems to be more of a trickle than a flood of option wagers with some fast money investors reluctant to put on trades until they have further conviction about the dollar’s direction and when the Federal Reserve may start its interest-rate cutting cycle.

“The nine-month window, as we move closer increasingly we’ll see a lot more bets on what the election outcome might look like,” Jun Bei Liu a portfolio manager at Tribeca Investment Partners said on Bloomberg Television. “It certainly seems the currency itself will be a big target.”

--With assistance from David Ingles.

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