Chinese yuan softens to near-year low after PBOC sets midpoint 351 basis points lower

Traders say currency will continue to weaken amid worries of trade war between China and the US

PUBLISHED : Wednesday, 20 June, 2018, 10:21am
UPDATED : Wednesday, 20 June, 2018, 11:00pm

The People’s Bank of China set the daily midpoint of the yuan 0.54 per cent lower on Wednesday, or 351 basis points below its previous fix, signalling further downward pressure on the currency after it ended at a five-month low on Tuesday.

Traders believe the currency will continue to weaken amid worries of a growing trade war between China and the United States. The strengthening of the US dollar, which rose to a 11-month high against other major currencies, particularly the euro, also added pressure to weaken the yuan.

The offshore yuan traded at 6.4870 per US dollar early on Wednesday, down 0.2 per cent from Tuesday, and a fresh five-month low before bouncing back to 6.4806 in the evening. The currency is now within a hair of this year’s low of 6.5453, recorded on January 10.

The currency has now fallen for three days, having closed at 6.4743 against the US dollar on Tuesday, a drop of 0.56 per cent from Monday.

The weakening of the yuan came after the PBOC set Wednesday’s daily midpoint rate at 6.4586 yuan per US dollar, weaker by 351 basis points from Tuesday’s midpoint setting of 6.4235. The yuan is permitted to rise or fall by up to 2 per cent from the midpoint on each trading day.

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“The weakening of the mid price set by the PBOC shows the central bank also wants to see the yuan fall with other currencies. The central bank has to do so as the euro dropped by 0.6 per cent against the US dollar, while the US dollar index rose by 0.5 per cent overnight. The yuan is now linked to a basket of currencies and its trading level will be affected,” said Jasper Lo, chief of investment strategies at Eddid Securities and Futures.

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“Looking ahead, the yuan is likely to continue to fall further as worries about the US and China trade war linger. The euro will continue to fall as the European Central Bank has declared it will not raise interest rates for the next 12 months, while the US Fed has indicated more rate rises are to come. We are going to see a strong US dollar and weaker yuan in the near future,” said Lo.

US President Donald Trump on Friday said the country would impose a 25 per cent tariff on US$50 billion worth of Chinese goods, and Beijing hit back by imposing a similar tax on 659 US products worth US$50 billion. This triggered a decline in US and Asian markets, and a sharp fall in the value of the yuan this week.

Stephen Innes, head of trading for Asia-Pacific at foreign exchange trading company Oanda, said the yuan and other currencies would continue to be haunted by the potential trade war between the US and China.

“The winds of a trade war are howling as a tariff -induced polar vortex has frozen out investors dead in their tracks. It’s been an intense 24 hours of attrition, which has seen many a savvy investor fold like a cheap deck of cards. But for those that survived the carnage, the spoils of war may be there for the taking, or more likely the fading,” said Innes.

“Investor complacency has given way to sheer terror, as there can be very little doubt the US and China have locked horns in a legitimate trade war as battle lines get drawn, and investors hunker down in safe havens preparing to ride this one out.”

Even after regional stock markets stabilised on Wednesday, Innes said, investors will continue to take a “wait and see” position on the developing trade war.

Eddid Securities and Futures’ Lo said for investors who want to hold the yuan for the long term, the current level may represent a buying opportunity.

“There are some traders who believe the yuan will continue to fall sharply to boost exports. I, however, believe this is not likely to happen, as a devaluation of the yuan will lead to capital outflows. I believe the PBOC will like to see the yuan traded at around the current level, at around 6.4 yuan per US dollar,” said Lo.