The US Federal Reserve's apparent impatience to raise interest rates again is an admission that ultra-low rates don't benefit the global economy anymore, and that it's better to risk the short-term financial volatility of "normalization" to get them back up to speed than it is to leave markets and investors hanging longer with too little nominal yield.
That being said, the Fed is again dependent on China for its hike schedule, as it first discovered towards the end of last summer. While other emerging market currencies have already depreciated so much since 2013 (the first rumblings of the current cycle of global dollar tightening), and therefore appear robust enough to sustain their early 2016 recovery even in the face of present Fed hawkishness, the yuan is more of a question mark - and it matters more than the rest of them put together.
Other things being equal, Beijing for its part prefers a weaker RMB - perhaps as low as 7.0 to the greenback - and would have already guided it there had the move in that direction not triggered such massive capital flight in the second half of 2015. If the People's Bank of China (PBOC) can now engineer the kind of gradual slide to the high-6's or even low-7's that it has thus far been unable to, we can expect a steady softening of the yuan for the remainder of the year. It'll draw harsh rebukes from Donald Trump, of course, but also signal the kind of progress to a more market-based exchange rate that will help the yuan enter the IMF's Special Drawing Right (SDR) basket of reserve currencies (alongside the dollar, euro, yen and pound sterling) on a sound footing in October.
More likely, though, the memory of August 2015 and January 2016 is too fresh in investors' and markets' minds: with an "L-shaped" stabilization now officially Chinese policy, the risk is too great that yuan weakness will again be interpreted as worse than officially acknowledged weakness in the real economy, and it's hard to see Beijing tolerating stress tests of its beefed-up capital controls since last winter if it can help it. PBOC recognizes that the yuan has a narrow band of safety before speculation of a larger devaluation unacceptably piles on again; this is probably between 6.6 and 6.65 for the offshore CNH, or little over 100 "pips", i.e. .0100, further down from the most recent lows of almost 6.59. As well, the offshore (Hong Kong) premium over onshore CNY (additional yuan-cents to buy a dollar) must be minimized, as PBOC has clearly done so towards end of this past week - not only to dampen speculative offshore betting of devaluation, but also to subject the mainland to greater global market influence and ease operating conditions for mainland-based firms.
This likely means more RMB softness in the weeks ahead and into the start of the second half, as even if May data in the US and China delay the Fed from hiking next month (until July or even September), the financial and currency markets still haven't fully priced in the Fed's determination to move as quickly as possible on normalization. Whether in China or elsewhere, market participants still seem to hold a widespread but erroneous view that normalization is bad for risk assets, when in fact central bankers probably recognize more than ever that persistent low rates are worse. Perhaps another 10 percent US stock correction is in the cards to shake investors out of this fallacy, and if so it'll likely be triggered yet again by the Shanghai Composite, which is only a single big day's drop (6.6 percent) away from its 52-week low in late January; but as noted above, Beijing will monitor the yuan's every pip of depreciation against the greenback to keep it in a safe zone, giving global stocks a solid floor.
Central banks are "neither god nor magician", as PBOC chairman Zhou Xiaochuan aptly put it, but until they truly fail beyond repair, they're still the only game in town - and more, not less so, for the West than for China, given that political (hence fiscal) gridlock has been more of an issue in democracies lately. That's bad news - as it has been since even before the financial crisis - for neo-liberal "market" fundamentalism, but hey, if China doesn't need Western economics, the West probably doesn't, either.
Donald Trump, for one, would definitely agree (regardless of what he does to Janet Yellen in 2018).
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