As the market waited for President Trump to announce dramatic punitive measures against China on 28 May, the RMB fell to its weakest point this year. However, the Trump administration balked at tearing up the Phase 1 trade deal. The RMB quickly stabilized and, I suspect, is poised to appreciate vs the USD.  

I am not ruling out a re-escalation of trade tensions at some point in this election cycle. But in my opinion, there is no fundamental reason for USDCNY to rise significantly, except in the scenario where either side scraps the Phase 1 trade deal. As a core view, I am now cautiously bullish on RMB. 

My reasoning is as follows:

The main reason for RMB weakness in the last two years was that the PBoC used FX devaluation to offset the effect of higher tariffs. This is very different from the 2015-16 period, where enormous and destabilizing capital outflows from China drove persistent weakness. In fact, net settlement flows in the last two years have been entirely within PBoC & SAFE’s control. FX reserves have remained stable. RMB devaluation in the last two years was a deliberate policy decision, rather than an intractable Balance of Payments problem.