The yuan has fallen near crisis-era levels. What China does about it will shape the trade war

One US dollar bought 6.92 yuan on Friday. The Chinese currency has weakened by almost 2.7% this month and is now uncomfortably close to the symbolically important level of 7 to the dollar, last breached during the 2008 financial crisis.

What happens next is important. China has a vested interest in stabilizing the currency, as does the United States. President Donald Trump has long argued that China devalues its currency to make the country more competitive.

But Beijing is in a tough spot.

Currency depreciation could help China by canceling out the impact of new US tariffs and keeping its exports affordable in America. But a big drop in the yuan could spark an outflow of money from China and hurt economic stability.

At the same time, the Chinese government may be hesitant to prop up its currency, since doing so could open Beijing up to further criticism from Washington.

"China is caught between a rock and a hard place," said Miguel Chanco, senior Asia economist at Pantheon Macroeconomics.

China may be tempted to use its currency as a weapon against the United States, Bank of America Merrill Lynch analysts Athanasios Vamvakidis and Claudio Piron said in a note to clients on Friday.

Letting the yuan depreciate would be a "softer" option than targeting US businesses or investments in China, they said. Veteran hedge fund manager Mark Yusko thinks China could do this without causing its own economy too much pain.

Typically, as the yuan weakens, China would have to worry about an exodus of money from the country, as investors lose confidence and swap yuan for assets in dollars and other currencies. Yusko argues that's not a problem for Beijing, which could enforce capital controls.

That doesn't mean such a strategy is without risks.

The yuan falling below 7 to the US dollar could trigger further selloffs, pushing it still lower, Chanco said. That would likely be unattractive to Beijing, he added.

Letting the yuan weaken could also boost Chinese inflation. That's a risk at a time when the economy is already showing signs of weakness, with retail sales cooling significantly.

Another big question is whether China chooses to sell US Treasuries at a more rapid pace, in turn buying yuan and shoring up its value.

China reduced its holdings of US debt in March to $1.12 trillion in US Treasuries, the lowest level in almost two years.

Chanco sees dumping US government debt as the nuclear option, while Yusko thinks China will absolutely speed up sales of Treasuries if a resolution isn't reached soon.

"I think it's very likely," he said.

2. Annual meetings: Amazon's annual shareholder meeting is on Wednesday, and this year's proxy statement is a doozy, with 12 shareholder proposals on everything from facial recognition technology to food waste.

A resolution supported by thousands of the company's own employees would require a report on the company's actions to address and prepare for climate change.

Amazon's investors have been famously deferential to the company's management, but with rising institutional support for environmental and social resolutions, this time could be different. BP (BP) has its annual meeting on Tuesday and is also facing resolutions on climate change.

Also on the docket is Deutsche Bank's annual meeting, which will take place in Frankfurt on Thursday. Deutsche Bank (DB), which has struggled since the financial crisis, is under significant pressure to map out a path forward as revenue falls faster than it can cut costs. Merger talks with crosstown rival Commerzbank (CRZBF) were called off last month.

3. Retail earnings: Retail earnings kick into high gear this week. Wall Street will monitor results from Target (TGT), Best Buy (BBY), Nordstrom (JWN), JCPenney (JCP) and Kohl's (KSS).

Walmart (WMT) set a high bar last week. America's largest retailer said sales last quarter at stores open at least a year increased 3.4% from a year earlier. Its online sales growth clocked in at 37% last quarter.

But Walmart warned it will raise prices on some products as a result of the Trump administration's tariffs on Chinese goods. "Increased tariffs will lead to increased prices, we believe, for our customers," Walmart's chief financial officer said.

Expect analysts to press the retailers on how they plan to deal with tariffs and their exposure to China.

4. Meeting in the desert: Armed drone attacks. A deepening trade war. Devastating sanctions on Iran and Venezuela. There is no shortage of flashpoints for OPEC and its allies to discuss at Sunday's meeting in Jeddah, Saudi Arabia.

The summit, held by the group's compliance committee, could offer clues about whether producers will bow to pressure from Trump to ramp up output at next month's meeting in Vienna.

5. Coming next week:

Monday — Japan GDP; Twitter (TWTR) annual meeting; Xiaomi earnings
Tuesday — BP annual meeting; Kohl's, Home Depot (HD), Nordstrom, JCPenney, Urban Outfitters (URBN) and TJX (TJX) earnings
Wednesday — Fed minutes; Amazon annual meeting; Target, Lowe's (LOW) and L Brands (LB) earnings
Thursday — Indian election results; Deutsche Bank annual meeting; US new home sales; Best Buy (BBY), Ross Stores (ROST) and HP earnings
Friday — US durable goods orders; Foot Locker (FL) earnings

Nathaniel Meyersohn, Matt Egan and Lydia DePillis contributed to this report.

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