Yuan outlook cloudy as currency falls to 20-month low amid Turkish lira concerns, trade war
China’s central bank lowers the daily currency midpoint by 0.23 per cent to 6.8856 yuan per dollar for the sixth straight day
The yuan dropped 0.4 per cent to a 20-month low against the dollar on Wednesday afternoon after the People’s Bank of China lowered the daily currency midpoint, with analysts saying the yuan will be weighed down by the ongoing Turkish lira crisis and escalating trade war between US and China.
Offshore yuan, traded by international investors outside the country, dropped to 6.9286 yuan per US dollar, the lowest level since January 3, 2017 when it traded at 6.9581, according to Thomson Reuters data. The currency has dropped seven days in a row by a combined 0.9 per cent. It traded at 6.9184 on Wednesday evening.
The PBOC lowered the daily currency midpoint by 0.23 per cent to 6.8856 yuan per dollar. This marked the sixth straight day the central bank has lowered the midpoint by a combined 0.6 per cent. Traders are allowed to deal in the currency up to 2 per cent on either side of the fix.
The yuan has lost 8.4 per cent since June 14 when the PBOC opted not to follow the US in raising interest rates, causing international traders to sell offshore yuan and shift to the US dollar as it offers a higher interest rate. The decline was also precipitated by the escalating trade war around the same time.
Onshore yuan, which is traded by mainland traders, also dropped 0.4 per cent to close at 6.9066 per dollar – the weakest level since mid-March 2017. It has fallen five days in a row by a combined 1 per cent.
“The Turkish lira crisis that started late last week has led to a sharp fall in stock and currency markets across all emerging markets including mainland China and Hong Kong, putting further downward pressure on the yuan,” said Jasper Lo, chief investment strategist at Eddid Securities and Futures.
“This has added strength to the US dollar against other emerging market currencies, giving the yuan little chance of bouncing back under such a situation.”
The lira fell to a record low on Monday to 7.2149 per US dollar. The currency is down 30 per cent from last Thursday when the Trump administration doubled tariffs on steel and aluminium imports from Turkey.
The lira bounced back about 7 per cent to 6.0890 on Wednesday, but Lo said the Turkish crisis would continue to affect other currencies.
The Hong Kong dollar also went down to the weak end of the peg at 7.85 per dollar, which forced the Hong Kong Monetary Authority on Wednesday to intervene in the foreign currency market for the first time since May.
“This has caused the market to worry about the yuan. The outlook for the offshore yuan is not optimistic,” Lo said.
Martin Lam, chief analyst for Asia-Pacific at forex trading firm ATFX, said the trade war is hurting the yuan as both sides refuse to back down, referring to the latest round of tariffs that start on August 20 and the US looking to add new tariffs on US$200 billion worth of Chinese goods.
“Also the outlook for the Chinese economy is weak, which is adding pressure on the yuan,” Lam said.