Back in January, Steve Mnuchin made waves in Davos when, just 48 hours after the Trump administration fired the first shot across the bow in what has since morphed into an all-out global trade war by slapping tariffs on residential washing machines and solar equipment, the Treasury Secretary jawboned the dollar lower, much to the chagrin of Mario Draghi.

Administration officials (including Trump himself) would attempt to walk back Mnuchin’s comments, but the message was clear: the U.S. was adopting a weak dollar policy by proxy via its aggressive trade stance.

The greenback would subsequently bottom before staging a relentless rally in the months ahead on the back of hawkish Fed policy that opened up a policy divergence with the rest of the world that was simply too wide to ignore. Although rate differentials had been moving in favor of the greenback for months (at least vis-à-vis the euro), the dollar was weighed down by worries about what Trump’s trade stance telegraphed about the White House’s desire for a weaker currency and also by America’s worsening fiscal position. But finally, the dollar’s correlation with rate differentials reasserted itself and between Jerome Powell’s consistent hawkish lean and the outperformance of the U.S. economy, the greenback’s ascent continued, effectively watering down the effect of Trump’s tariffs.

Meanwhile, China began to ease, using the bevy of tools at the PBoC’s disposal. The decision not to follow the Fed in June (i.e., the PBoC didn’t hike OMO rates in a break with recent precedent) and the subsequent RRR cut underscored Beijing’s desire to loosen things up as the domestic economy continued to decelerate and before you knew it, the yuan was weakening at the fastest pace since the 2015 devaluation.

Fast forward to this week and Donald Trump had had enough. In a bombshell interview with CNBC’s Joe Kernen, Trump criticized the Fed and decried the fact that the yuan is “dropping like a rock”.

That was on Thursday and hours after the first clips from the interview aired, the PBoC weakened the yuan fix by the most since June 2016, a clear message to Trump that Beijing isn’t going to let him off the hook that easily.

Well, not to be outdone, Trump proceeded to lambaste China (and for good measure, America’s new “foe“, the E.U.) on Twitter on the way to explicitly stating that Jerome Powell’s tightening is “hurting all of the things” the administration is trying to do.

That tweet broadside came just hours after CNBC aired the rest of Trump’s interview and wouldn’t you know it, he also told Kernen that he (Trump) is fully prepared to slap tariffs on all Chinese exports to the U.S.

Ultimately, all of this whipsawed the yuan. I posted this chart first thing Friday morning:

Six hours later, Goldman released the following visual, which they’re calling “the chart of the week”:

I’m glad they agree that’s an important chart.

In any event, the overarching point on Friday is that Donald Trump’s trade war has become FX-focused, and you can read some of the reactions to that in “‘Dangerous’, ‘Excessive’, ‘Aggressive’: Donald Trump Starts Global Currency War“.

Well, coming full circle to Steve Mnuchin (who, again, knows a thing or two about what it means to deliberately manipulate a currency), the Treasury Secretary has effectively issued a warning to China about weaponizing the yuan. Here’s what he said in an interview with Reuters, in Sao Paulo, Brazil:

I’m not saying whether it’s a weapon or not a weapon. There’s no question that the weakening of the currency creates an unfair advantage for them. We’re going to very carefully review whether they have manipulated the currency.

So, China is now at risk (again) of being labeled a currency manipulator when the next review is completed in October.

This is all kinds of ridiculous for two reasons:

1. China wouldn’t be in this situation if it weren’t for Trump’s trade policies, something Mnuchin undoubtedly appreciates because after all, he’s the adult in the room when it comes to this and he even tried to put the whole thing “on hold” back in May
2. China is basically just letting the Fed’s hawkishness do all the work here and the reason the Fed has to be so hawkish in the first place is because Trump’s fiscal policies amount to piling stimulus atop a late-cycle dynamic, increasing the risk of inflation. To make matters worse, tariffs have the potential to drive up domestic prices too. The Fed has to guard against that, which means if Trump is looking for someone to “blame” for Fed hikes and thereby for the policy divergence with China that’s pushing the yuan weaker, well then “mirror, mirror on the wall, who’s the most stable genius of them all?“

Nothing further.