The RMB and the Global USD Squeeze

Global US dollar funding conditions have tightened sharply over the past two weeks, triggering an aggressive response from the Fed to extend and expand USD swap lines with central banks. So far, the PBOC is holding the line, and appears to be intervening to defend the RMB. However, the combination of capital outflows from emerging markets and rising US-China political tensions create new risks that China will change its management of the currency. Any perceived policy-driven RMB depreciation would further tighten USD funding channels within supply chains, and counterproductively reduce global trade activity, while also likely intensifying risk-off sentiment in global markets.

Posted March 26, 2020
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