New currency forecasts, trade war escalates, rate cuts

While we had been expecting an escalation in US-China trade tensions, China’s decision to allow the renminbi to weaken through 7.0/US$ in response to Trump’s latest tariffs means events are moving more quickly than we had expected. We now expect the renminbi to fall to 7.3/US$ by year-end, which will weigh on other Asian currencies, with the Taiwan dollar, the Korean won and the Malaysian ringgit most affected. However, we continue to think that impact on exports from the trade war will be relatively small for the rest of the region, as shifting US demand offsets the hit to demand from China.