Again from David Llewellyn-Smith at Macrobusiness
….we believe the dovish stance adopted by the Fed in the latest FOMC, and thereby a weak dollar, could help lower the depreciation pressure on the RMB and China’s capital outflows. This is a positive development of international policy coordination since the recent G20 meeting in Shanghai. Two scenarios are possible:
A positive one: Weak dollar -> stable RMB -> lower capital outflows from EM – > higher risk appetite globally -> weaker dollar. It’s a positive feedback loop, but it requires policy coordination between China and the US. China needs to be clear about no major devaluation, while the US needs to mind the strength of the dollar as the result of its policy moves.
And a negative one: Strong dollar -> weaker RMB -> higher capital outflows from EM -> lower risk appetite globally -> stronger dollar. It’s a negative feedback loop. In the end, it could force the Fed to postpone rate hikes, as rising market volatility and a strong dollar could hurt the recovery in the US.
This is going to require careful management on a global scale (China and US working together) to avoid a complete rout of capital markets.