Yuan gains while pound falls amid UK terror attack, election worries
Yuan continued to rise against the US dollar on Monday morning after the Chinese central bank set the reference rate higher while pound sterling was down after the terror attack in London and ahead of the British general election this week.
Sterling traded at US$1.2863 per pound on Monday morning, down 0.15 per cent. It was the first trading day after seven people were killed and 48 injured in an attack over the weekend.
The latest attack, the third in three months, came just days ahead of the general election vote on Thursday.
“It makes for a difficult start to the week, but we are growing accustomed to market fallouts on these types of events as the market impact diminishes quickly. We’re seeing a minor drop in the pound but this is likely due to weekend polls suggesting the Tory lead is down to 1 per cent,” said Stephen Innes, senior trader at Oanda.
“So far the market reaction has been quite muted on both the pound and risk in general as it feels dealers are becoming desensitised to the terror atrocities on soft targets,” he said. “The markets will likely focus on the UK elections and upcoming European Central Bank meeting as the primary drivers this week.”
The UK terror attack didn’t prevent the yuan from rallying. Onshore yuan in Shanghai traded at 6.7963 yuan per dollar early on Monday, up 0.2 per cent from Friday. The currency had risen 0.64 per cent against the greenback last week.
Offshore yuan trading in Hong Kong softened slightly to 6.7732 in early trade, down 0.06 per cent after a strong rally of 0.68 per cent last week.
On May 26 the Chinese central bank announced it would tweak its mechanism for fixing the daily yuan rate by adding a “counter-cyclical adjustment factor” .
On Monday the PBOC set the reference rate at 6.7935 yuan per US dollar, stronger by 135 basis points, or 0.2 per cent stronger than Friday. Traders are allowed to trade 2 per cent either side of the reference point.
Traders believe the range of measures are aimed at crushing speculators who have a bearish outlook on the yuan, by sending out a signal that the country will not tolerate a weakening yuan.
“The offshore yuan funding has returned to almost normal levels, so we are expecting the yuan performance to be more in line with the US dollar fallout from a less than stellar Friday non-farm payroll figure. But I expect the RMB complex to trade with a neutral bias ahead of mainland trade data on Wednesday and the CPI inflation print on Friday, both of which have the potential to move the markets,” Innes said.