Yuan hits three-month low after People’s Bank of China lowers reference rate amid trade war concerns

Spot yuan fell to 6.3700 against US dollar before retracing to 6.3562 on Thursday

PUBLISHED : Thursday, 03 May, 2018, 8:18pm
UPDATED : Thursday, 03 May, 2018, 11:00pm

The yuan fell to its weakest level in over three months on Thursday, after the Chinese central bank lowered its daily currency reference rate. The move suggests authorities might be trying to limit the strength of the Chinese currency given China’s slowing economic growth and rising uncertainty from the ongoing US-China trade dispute.

The People’s Bank of China lowered the mid point for a fourth straight day on Thursday. Traders were allowed to trade up to 2 per cent on either side of the reference point, and in response the spot yuan fell to 6.3700 against the US dollar – its lowest level since January 14 – before retracing slightly higher to 6.3562.

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Analysts said a weaker currency fix and recent moves by authorities showed China was moving to a neutral monetary policy stance from a tight one previously, in an apparent effort to counter the uncertainty caused by concerns over the ongoing trade dispute between Washington and Beijing.

The Chinese currency has appreciated by 0.1 per cent against the US dollar this year, the fourth strongest performer among the 11 most traded currencies in Asia. Against a basket of foreign currencies, the trade-weighted RMB CFET index has risen to a 11 month high of 96.99.

So the authorities might want to limit the strength of the yuan at a time when the US dollar is climbing because of the outlook of US interest rates. The US Federal Reserve kept interest rates unchanged overnight, as widely expected, but its comment about the “gradual” pace of normalisation means it is on track for one 25 basis point rate increase per quarter, picking up from a slower pace of one increase per year in 2015 and 2016, DBS Bank said in a research note.

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“The PBOC’s stance is shifting away from its previously tight bias because of the softer outlook in the economy,” said Jimmy Zhu, chief strategist at Fullerton Markets in Shanghai, who added that he had downgraded his half-year forecast for the yuan to 6.43 against the dollar from 6.35 previously.

The PBOC’s stance is shifting away from its previously tight bias because of the softer outlook in the economy
Jimmy Zhu, chief strategist, Fullerton Markets

The PBOC unexpectedly cut banks’ reserve requirement ratio recently, while over the weekend policymakers also eased asset management rules from their initial draft in November that were aimed at curbing the shadow banking sector.

Standard Chartered Bank said it expects the yuan basket to hold in a steady range, which will allow authorities to push back against comments from the US that they were weakening the currency. The arrival in Beijing on Thursday of a US trade delegation fuelled concerns that a breakthrough was unlikely. Chinese state media reported that Beijing would stand up to US pressure if it was necessary, even though it was better to work things out at the negotiating table.

“A much weaker yuan risks China’s capital picture returning to outflows, having just stabilised, which would be an undesirable outcome for the authorities,” according to Standard Chartered.