The PBOC’s task becomes increasing difficult with a strong USD since China decided to hitch its star to the USD. China from the 1980’s until now has exported goods and capital to America. The DXY
Index ( US Dollar
Currency Index) weakened to a low of 72.00 in Spring 2008. Since then, it has rallied over 33%. The CNY
has strengthened 5% in USD terms and manufacturing wages are up 128% over the same time period. In FX terms, Chinese goods are 38% more expensive, and profit margins of manufacturers are collapsing. Further USD strength will be crippling to the economic base of China. A strong USD also intensifies capital outflows as rich citizens
rush to convert their wealth into a strong and rising USD.
Each time the Fed has thought about or actually completed a rate hike, China has responded forcefully by devaluing the Yuan.
We expect PBOC to further devalue their currency in response.