Things move fast.

Last night, the Senate passed a bill that would impose tariffs on currency manipulators like China.

It's not expected to pass the House or get signed by The President, but China has already responded to the provocation.

As Nomura explains, it fixed the yuan shockingly low against the dollar last night, moving it in the exact opposite direction the U.S. wants:

The disappointing USD/CNY fix today, 116 pips higher than yesterday’s (to 6.3598) and compared with our model forecast of 23 pips could reflect an element of Chinese retaliation to the Senate’s vote. The last time we saw such a big fix (compared to the previous session) was on 29 November 2010 (147 pips), which came on the back of EUR weakness (broad USD strength) on EU-related debt concerns (primarily Ireland). Previous large USD/CNY fixes that surprised on the upside (in October-November 2010) coincided with either North Korea provocation or followed major political events (the G20 Leaders summit, Premier Wen Jiabao’s October visit to Europe)

However, before you think we're looking at a full-on trade war, some caveats:

1) The approach of the G20 Leaders summit (3-4 Nov) could still see USD/CNY resume lower fixings (after today’s ‘warning shot’);

2) Macro data continues to support CNY appreciation over the medium term. This Friday’s September CPI will be closely watched, with Nomura forecasting 6.3% y-o-y (Consensus, 6.1%; Previous, 6.2% – Exhibit 2). Thursday’s trade data should also be supportive, with September exports expected to rise by 20% (Consensus: 20.8%) and the trade surplus expected to widen to US$20.3bn (from US$17.8bn in August); and

3) It is still too early to conclude that the Schumer bill will actually become law.

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