The key word there being "if" of course
The yuan fell to its weakest level against the dollar this year after Trump announced fresh tariffs on China overnight, with USD/CNY inching closer towards the 7.00 level.
On the latest development, Citi argues that China may prefer to keep the yuan stronger than 7.00 per dollar if trade negotiations are set to continue, despite Trump's latest actions.
Adding that the PBOC has kept daily yuan fixings below 6.90 this year (today was at 6.8996) and if it continues to do so then there will be limited follow through weakness to the offshore yuan and other emerging market currencies.
The firm also notes that the escalation in the trade war rhetoric is a setback for risk assets and will take a toll on investor sentiment but argues that the fallout may be contained if US-China trade negotiations continue.
All very nice words but hinges a lot on the big "if" on trade talks. Let's wait and see how China responds to yesterday's development for a better idea. For now, markets are right to maintain a more nervous approach in anticipation.