China’s economy is being pulled in opposite directions by two powerful forces. Which will prevail is crucial for how currencies that rely on the Asian giant will go. Over the last couple of weeks, markets have become increasingly worried about global economic growth and trade, and the impact of China tariffs. Some good news here could spark a relief rally. But if the data is not good enough, then commodity currencies in particular could take another hit.
Of course the thing that is really shaking things up right now is the latest wrinkle in the tariffs saga. US President Donald Trump had initially threatened tariffs on Mexico and Canada, which were suspended until March 4th, pending negotiations. On Thursday, he confirmed those tariffs would go into effect, citing lack of progress in dealing with fentanyl illegally entering the US. Although he also said the tariffs wouldn’t be “necessary” if there were a trade deal. Along with the announcement, he confirmed that tariffs on all goods imported from China would increase to 20% from 10% on the same data.
More Tariffs or More Negotiation
When Trump first applied tariffs to China last month, the response from Beijing was seen as measured. The next round of China tariffs are expected to elicit a similar response, as analysts suggest that the tariffs won’t be in place for long as the White House is looking to negotiate a deal with China. Although they caution that Trump might increase tariffs even further as part of ramping up pressure to get concessions.
The notion of tariffs as a bargaining tool was affirmed by US Treasury Secretary Scott Bessent this week, but there wasn’t any clarity on exactly what was being negotiated for. Trump has been more explicit in his demands from Europe – increasing oil imports to offset the trade deficit – but hasn’t made public what is being demanded of China. This makes it harder for analysts to figure out how long tariffs will be in place, and what their potential impact will be.
The Effect on Currencies
Regardless of the geopolitical tactics, the market sees China tariffs as slowing trade and gumming up the economy, and is reacting accordingly. Investors are pulling out of stocks and commodity currencies and piling into safe havens such as the dollar. The rising interest rates on US debt has left gold out in the cold.
Chinese authorities were seen stepping up efforts to avoid capital flight as the yuan lost value against foreign currencies. Tariffs are expected to have a drag on the world’s second largest economy, just as authorities in Beijing are pulling out more and more stops to support the economy. Earlier this week, China’s President Xi Jinping gave an interview in which he renewed pledges to support the domestic economy, specifically addressing the housing and tech sectors.
The Data Moves
As a result, all eyes will be on China’s PMI measures to see which aspect is taking precedence in the mind of businesses. If China’s stimulus is sufficient to get the economy back into expansion, keeping PMIs above 50. Or will it stay stuck in contraction as investors worry about the impact of tariffs.
On Saturday, China’s National Bureau of Statistics releases its version of February PMIs. The manufacturing component expected to pop back into expansion by the bare minimum to 50.0, but up from 49.1 prior. The Private Caixing survey comes out on Monday, where Manufacturing PMI is expected to advance further into expansion to 50.6 from 50.1 prior.
