Now’s not the time to short the yuan

As the “Trump trade” returns to make fear of geopolitical upheaval great again, global hedge funds are racing to short China’s yuan currency.

They are betting that Trump’s planned mix of tax and trade policies will send the dollar higher if he’s elected and that China might seek a more competitive exchange rate as domestic growth slows.

Yet, if the last few years of the Xi Jinping era are any guide, betting on a weaker yuan could be quite the blunder,

Let’s start with the Trump calculation. Clearly, the November 5 US election is a genuine toss-up. One day, polls suggest Kamala Harris’ Democrats will prevail. The next, intel emerges to telegraph a Trump 2.0 White House is coming.

This week, the momentum seems to be on Trump’s side. It’s prompting hedge funds to up bets on a weaker yuan in the US$300 billion currency options market. Yuan volatility is now at its highest since late 2022.

Yet expectations that Trump might favor a stronger dollar seem to forget his 2017-2021 term. Trump was adamantly in favor of a weaker US exchange rate to advantage American manufacturers and punish China.

It’s also worth remembering Trump’s assault on the US Federal Reserve. Trump was apoplectic that his chosen Fed chairman, Jerome Powell, continued predecessor Janet Yellen’s rate hikes. He then browbeat Powell into cutting rates, adding stimulus in 2019 that the economy didn’t need.

On top of the Fed’s dented credibility, the US national debt soared under Trump and current President Joe Biden, now topping $35 trillion.

Add in the risk of political polarization between now and January 20, 2025, when the next administration formally takes office. Even if Trump loses, no serious pundit thinks he will go away quietly.

The fallout from the