Market tensions are increasing this morning following Trump’s threat to use tariffs to “punish” China for the way it handled the coronavirus outbreak. Over the past two days, the blame game between Washington and Beijing has sharply intensified. China blasted the United States on coronavirus response while some U.S. officials spread rumors of Wuhan lab COVID-19 origination.
As a result, the yuan offshore (CNH), which is the ultimate barometer for US-China trade war, is on high alert again. It is approaching a key technical resistance at 7.15. That level has become a line in the sand for investors all around the world and, if broken, it could signal that China is ready to let go further its currency which would have very negative implications for risk assets.
A break would mean more contentious trade war on the top of the preexisting health and economic crisis and would induce a big move in the dollar and put negative pressure on equities and emerging-market assets. At this time of the year, the classic rhyming investment adage argues you should sell before the summer. A further weakening in the Chinese yuan might finally be the reason for a market sell-off.