Yuan loses 3 per cent in nine days, points to tolerance for weakened currency in Beijing as US trade war looms

Offshore yuan drops to lowest level since December 21, 2017

PUBLISHED : Tuesday, 26 June, 2018, 12:34pm
UPDATED : Tuesday, 26 June, 2018, 7:32pm

The yuan dropped for a ninth day on Tuesday, extending its longest losing streak in four years, because of expectations that the People’s Bank of China (PBOC) was shifting to a policy allowing the Chinese currency to depreciate amid an escalation of China-US trade tensions.

[The yuan’s] weakness has accelerated since concerns intensified the US and China could embrace a trade war
Jameel Ahmad, global head of currency strategy and market research, FXTM

On Tuesday, the offshore yuan traded at 6.5911 per US dollar, down 0.6 per cent from Monday, marking its biggest daily drop since February 8. It is now trading at its lowest level since December 21, 2017.

Against a basket of currencies, however, the yuan was trading near a two-year high of 97.88 hit in May, according to the China Foreign Exchange Trade System RMB index.

Resilience in the yuan relative to a sell-off in other currencies, such as the euro, this year reflects the PBOC’s efforts towards stabilising the currency to attract foreign investors to buy mainland stocks and bonds, thus internationalising the yuan.

However, the recent accelerated decline in the yuan, which has dropped 3 per cent in the past two weeks, against the dollar points to a change in the central bank’s policy of tolerating a depreciating yuan, analysts have said.

This has quickly transformed the yuan from being one of the best performing emerging market currencies across the globe to now trading more than 0.7 per cent lower year to date.

“The PBOC is likely to allow the yuan to depreciate to offset potential slowing exports from the escalating trade conflict,” said Jimmy Zhu, chief strategist at Shanghai-based Fullerton Markets. Zhu forecast the yuan to drop to 6.61 against the US dollar by the end of the third quarter, while the Chinese currency was most likely to have peaked against the basket of currencies.

Media reports said the Trump Administration was planning to invoke the International Emergency Economic Powers Act to impose restrictions on Chinese investment in US companies, in sectors ranging from aerospace to robotics, which suggests it was scaling up measures to contain the rise of China in manufacturing capabilities.

In response, the yuan and China equities extended their declines and set fresh year-to-date lows.

Jameel Ahmad, global head of currency strategy and market research at UK foreign exchange trading company FXTM, said the PBOC was possibly allowing the yuan to play catch up to the losses most global currencies and emerging market counterparts have faced, given the fact there has been a broad-based US dollar rally across foreign exchange markets over the second quarter.

“The yuan is suffering in line and in similar form to its emerging market counterparts, but the speed in weakness has accelerated since concerns intensified the United States and China could embrace a trade war,” he said.

Ken Cheung Kin Tai, senior Asian foreign exchange strategist at Mizuho Bank, said the PBOC would most likely allow for further yuan depreciation to support growth, but only as long as capital outflow pressures stayed under control.

The yuan started to fall on June 14, after the Chinese central bank decided not to follow US interest rate increases on the day, and following an escalation in the US and China trade dispute.

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

The sharp fall on Tuesday came after the PBOC set the midpoint price down by 287 points, or 0.4 per cent, from Monday. The midpoint price, which the central bank has lowered for the past five days, is down by a total of 1.5 per cent.

Traders can only trade 2 per cent up or down from the midpoint price announced by the PBOC every morning. The lowering of the midpoint price is viewed as signalling the direction the PBOC wants the currency to take.