According to a research note by the firm's strategists
The note says that an escalation to an outright trade war is plausible, but China is unlikely to use the yuan to retaliate against the possible implementations of fresh tariffs.
They argue that China has spend over $1T of reserves to slow capital outflows, so it will be counter-productive to weaken the yuan at a time when the Chinese are presumably jittery, just because of global trade issues.
Meanwhile, they highlight that only China and the EU has the size to strike back in a way that could potentially harm the US economy in the event of any retaliation. Adding that while China has "reacted very cautiously", that could all change if Trump overreaches when further tariffs are implemented against China.
Regarding a global trade war, Citigroup says that it would result in a selloff in global equities and US rates would fall. They note that the impact on the dollar is less clear but they say that emerging market FX will likely sell off due to risk aversion.
However, they say that a weaker dollar against the G10 currencies will help to cushion that blow to emerging market FX - leading to only a small pullback if that were to materialise.
