US-China tariffs to go all out, lowers yuan call: JP Morgan

Bloomberg

With little prospect of a restart for US-China trade talks, JPMorgan Chase & Co. now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade.
“JPMorgan has adopted a new baseline that assumes a US-China endgame involving 25 percent US tariffs on all Chinese goods in 2019,” JPMorgan strategists including John Normand wrote in a
note. While growth forecasts for both the US and China aren’t much affected, thanks
in part to Chinese stimulus measures, “a weaker yuan becomes part of the new equilibrium,” they wrote.
The People’s Bank of China will probably pursue a looser monetary policy to shore up growth in face of the threats to trade, and likely won’t intervene much to counter resultant downward pressure on the yuan, according to the JPMorgan analysis.
The bank now expects the yuan to drop to 7.01 per dollar by the end of December and 7.19 by September 2019, after previously projecting it at 7.02 in 12 months’ time. China’s currency closed at 6.8725 per dollar in onshore trading last week.
The median forecast of analysts surveyed by Bloomberg is for the currency to strengthen to 6.70 by the end of next year. Deutsche Bank AG is among the yuan bears, seeing it depreciate to 7.4 next year.
“Looser Chinese monetary policy ensures that the US dollar will become an ever-higher yielder versus the renminbi for the rest of the cycle,” the JPMorgan strategists wrote, using another term for China’s currency.
The yield gap will favour the dollar thanks to further Federal Reserve tightening, in the team’s outlook.