Financial safety

China’s currency is sending a warning signal about the trade war

China’s currency has been an important barometer for progress in U.S.-Chinese trade talks, and right now it’s signaling that things aren’t going well.

The question is whether that signal is intentional, and whether Chinese officials will step in to prevent the yuan from reaching a key psychological low of 7 to the dollar. That level has become a line in the sand for markets around the world, and if broken, it could trigger a negative reaction in risk markets globally, as investors move to price in a bigger economic impact from a longer, more contentious trade war.

The yuan has been fairly stable this year, as the U.S. and China carried on trade talks. But since President Donald Trump tweeted about new tariffs May 5, the onshore yuan or CNY, has lost 2.7% against the U.S. dollar.

“Obviously, the trade shock we’re now discussing is a full blown trade war, so it’s obviously a very serious scenario. Then we have this negotiations period, where it could be averted and that doesn’t seem to be very good at all,” said Jens Nordvig, CEO of Exante Data. “It’s also unclear whether the Chinese officials want to fight hard to keep the currency stable.