Chinese yuan slides to 5-year low, pound slumps further in Brexit aftershock
Oil extends rout while investors continue to flock into safe haven assets such as yen, Swiss franc and gold
The People’s Bank of China on Monday cut the yuan’s fixing to the lowest level in five and a half years, while the British pound slumped further below US$1.34 in Asian trade, hovering near its weakest level in 31 years, as Britain’s stunning decision to break from the European Union continued to stir the markets.
The PBOC set the yuan’s reference rate at 6.6375 per US dollar, down 0.9 per cent from the previous fix, the biggest drop since August. Offshore yuan in Hong Kong weakened to 6.6749 per US dollar at 5.30pm, down 0.6 per cent from the prior session. Onshore yuan, which trades in Shanghai, also fell to 6.645 per US dollar, weaker by 0.5 per cent from the previous trading day.
“The yuan continues to weaken in the face of a stronger USD following the Brexit vote. The fear is that this may revive concerns of further devaluation, which could be in the offing,” said Stephen Innes, senior trader at Oanda Asia Pacific. “I anticipate the risk theme to continue driving the investor sentiment, with the yuan trading off its back foot.”
Separately, the British pound fell 3 per cent to 1.3269 against the US dollar at 5.30pm on Monday, extending its largest one-day drop ever at the end of last week. On Friday, sterling at one point plunged more than 10 per cent to US$1.3230, its lowest level since 1985, before trimming losses to US$1.3676, off more than 6 per cent.
On Friday, vote tallies indicated that a majority of Britons wanted to leave the European Union (EU), spurring British Prime Minister David Cameron to resign. The results immediately rattled global financial markets and pummelled riskier assets.
“It is important to keep in mind that the Brexit fallout isn’t over. We are likely to feel aftershocks for weeks, perhaps months, to come,” Innes said. “We should expect more waves of risk-off sentiment to hit the market as the Brexit fallout intensifies.”
He also forecast more volatility in the value of the pound.
“From a structural perspective, the pound is extremely vulnerable,” he said. “If the UK’s rating comes under fire and investors’ appetite for the UK turns negative, the pound will suffer and the UK will struggle to fund the shortfall.”
The Bank of England may cut interest rates at its August meeting, which will “weigh heavily” on the pound, Innes said.
The pound may fall further in the coming months and trade between 1.15 to 1.2 against the US dollar by year-end, according to his estimation, as concerns mounted that London’s status as a global financial capital will crumble if the UK loses its “passporting” rights, which permit banks to locate themselves in the UK while offering products and services in the EU.
In other trading, oil futures were also volatile. WTI crude for August delivery fell as much as 1.5 per cent to US$46.92 a barrel in earlier trade. It rebounded to US$47.71 a barrel at 5.20pm, up 0.2 per cent. August Brent also briefly dropped 1.3 per cent, before recovering to US$48.56 a barrel at 5.20pm, up 0.3 per cent from the previous close. On Friday, the US and global oil benchmarks both sank 5 per cent, finishing at US$47.64 a barrel and US$48.41 a barrel respectively.
However, safe haven assets surged, as investors flocked to the Japanese yen, the Swiss franc and gold for risk aversion.
On Monday, the yen strengthened further against the greenback, with the US dollar weaker 0.3 per cent to 101.843 yen as of 5.30pm. The dollar bought 102.24 late Friday, down 2.4 per cent from the prior session. The Swiss Franc also continued to firm against the euro on Monday, with the euro buying 1.0742 francs as of 5.30pm, compared with the previous close of 1.0812 francs.
Gold futures for August delivery advanced 0.6 per cent to US$1,330.2 an ounce Monday afternoon, after settling Friday higher by 4.7 per cent to US$1,322.4 an ounce, their highest level since July 2014.