Yuan extends losing streak for record ninth straight week ahead of devaluation anniversary

PUBLISHED : Friday, 10 August, 2018, 8:28pm
UPDATED : Friday, 10 August, 2018, 8:28pm

China’s yuan is set to extend its record weekly losing streak on Friday, three years after the nation attempted to reform the exchange rate that had sent shock waves across the global stock and currency markets.

The People’s Bank of China devalued the yuan by nearly 3 per cent against the US dollar in two days from August 11, 2015, a move it said was a free-market reform but had sparked market concerns that it was engaging in a currency war to boost competitiveness of its exports.

Since then, the central bank has imposed harsh capital controls, squeezed interest rates and burned through nearly US$320 billion of its foreign currency reserves to support the currency and quell market panic.

On Friday, the yuan dropped 0.46 per cent to 6.7751 per dollar, heading for its ninth week of declines, weighed by a crisis in Turkey that is causing traders to offload risky emerging markets and Asian currencies while buying the safe-haven US dollar.

The lira tumbled to another fresh record low because of mounting concerns about Turkey’s authoritarian trajectory under President Recep Tayyip Erdogan and a deteriorating economy.

While China’s worsening current account position also points to a longer term slide in the exchange rate, analysts say the depreciation was more manageable and disorderly capital outflows were not evident this time round.

Foreign reserves unexpectedly rose for a second month to US$3.118 trillion in July, exceeding a US$3.107 trillion forecast, according to official data on Tuesday, showing an absence of intervention needed by the PBOC to prop up the yuan.

Analysts said the increase mainly came from foreign investment after China opened up more sectors, especially after global index provider MSCI’s inclusion of yuan-denominated equities in its indices.

“A combination of portfolio inflows, macro-prudential measures and moral suasion may be making the yuan more robust,” said Claudio Piron, emerging Asia currency strategist at Bank of America Merrill Lynch.

Sentiment has been stabilising after the PBOC’s recent decision to raise the reserve requirement ratio to 20 per cent from zero for financial institutions when they conduct onshore yuan forwards business on behalf of customers, making it more expensive to short the currency.

The ongoing US-China trade war and the outlook of higher US interest rates may continue to strengthen the dollar that will weigh on the yuan.

To be sure, the yuan’s 8 per cent decline from its March peak appears to be reflecting the US dollar index’s gain of about 7 per cent this year against its major currencies. But the absence of hard landing fears in China, meant global financial markets were not so bothered about contagion risk emanating from China.

The S&P 500 has risen 12 per cent this year and the Dow Jones Industrial Average is up 8 per cent.