China’s yuan falls to lowest level of 2018, suffering longest losing streak in two years

Analysts see it slipping further as the China-US trade dispute shows no signs of easing and the central bank signals it will let the currency weaken more

PUBLISHED : Monday, 25 June, 2018, 11:03am
UPDATED : Monday, 25 June, 2018, 11:30pm

China’s yuan suffered its longest losing streak in two years, falling for an eighth straight session early on Monday to its lowest level of 2018.

Analysts expect it to slip further, down to between 6.55 and 6.6 against the US dollar in the near future, in light of the China-US trade dispute showing no signs of easing and the People’s Bank of China signalling it will let the currency weaken more.

The offshore yuan on Monday down 0.4 per cent lower than Friday’s close, and down 2.6 per cent from its level of 6.3876 on June 13, the day before the PBOC’s decision not to follow the US Federal Reserve in raising the interest rate rise sparked its decline.

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By about 7pm am on Monday evening, the yuan traded at 6.5538, the lowest since December 22 last year and has bypassed this year’s intraday low at 6.5449 seen on January 10. The yuan has now wiped out the whole of its 4 per cent gain against the US dollar earlier this year.

The PBOC on Monday set the yuan midpoint rate lower for a fourth day, down 1 per cent in that period. The yuan is not yet freely traded; the PBOC announces the mid-price fix every morning, around which the currency is allowed to trade up to 2 per cent either side.

The Chinese central bank on Sunday announced it would cut the amount of cash that some banks need to hold in reserve – known as the reserve requirement ratio – by 0.5 percentage points from July 5, unlocking 700 billion yuan (US$108 billion) of liquidity, as it seeks to control leverage and support smaller companies.

Morgan Stanley revised down its forecast for the yuan, predicting it will fall to 6.65 per US dollar by the end of the third quarter.

Stephen Innes, head of trading, Asia-Pacific, at Oanda, also sees the offshore yuan continuing to slide, heading down to 6.55 per US dollar in the near term.

“Although the PBOC’s cut of the reserve requirement ratio does not have direct policy implications, it did suggest some concern about the economy and the trade war. We could see the PBOC take significant policy measures such as lowering interest rates as local equity markets continue to struggle,” Innes said.

“With the US interest rates on the rise and a possible dovish shift from the PBOC, I am looking for offshore yuan to trade against the US dollar down to 6.55-level in the near-term,” Innes said.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, also expected the yuan to go further down to between 6.60 and 6.65 to the US dollar.

“How China manages the yuan is a strategic decision and it is unlikely to accelerate the depreciation to compensate for the 25 per cent tariff,” said Chandler.

A devaluation of sufficient magnitude to blunt the tariffs is likely to open the proverbial Pandora’s Box and spur a vicious cycle of outflows and depreciation, and could set back China’s other strategic goals, he added.

Heng Koon-how, head of market strategy for global economics and markets research at UOB, said the yuan and other Asian currencies will continue to be weaken due to US interest rate increases.

“However, the escalating of the US-China trade conflict has made the pace of yuan and Asian currency weakness even faster,” said Heng.

“The yuan is weaker today because the market is concerned that US President Donald Trump may escalate the trade conflict next with new rules blocking Chinese corporates from investing in US technology firms,” said Heng.

“The RRR cut on Sunday also weighed on the yuan, although one could argue that Chinese authorities had telegraphed the move well in advance. Going forward, there is a risk that the yuan will weaken further and volatility may increase due to further deterioration in trade relationships,” said Heng.