Chinese yuan slumps to 8-year low as dollar extends gains

The yuan continued to weaken on Tuesday, sliding to an eight-year low after China’s central bank lowered the reference rate for the eighth consecutive trading day.

The ongoing drop in its value comes as the US dollar continues its post-election rally. The US Dollar Index, a gauge of the greenback against a basket of major currencies, traded at 99.53 after hitting one-year high at 100.11 earlier Tuesday morning, as investors anticipate higher government spending and more restrictions on trade under a Trump administration, both steps that could put an end to the low inflation which has ruled for the past decade.

Offshore yuan traded in Hong Kong narrowed its decline to trade 0.07 per cent or 51 basis points lower to 6.8584 per US dollar by 4.45pm, after earlier slipping to 6.87, the lowest level since before the launch of its offshore market in 2010.

Onshore yuan traded in Shanghai slumped for a fourth straight day, giving up 0.04 per cent or 30 basis points to trade at 6.8477 per dollar by 4.45pm, after earlier touching an eight-year low at 6.8640.

China’s central bank on Tuesday set the daily fixing 204 basis points or 0.3 per cent weaker at 6.8495, the lowest level in more than seven years.

Trading is allowed up to 2 per cent either side of the reference point for the day.

“Looking ahead, the Chinese yuan may come under short-term pressure but have limited room for further weakness in the medium term,” said Yu Xiangrong and Liang Hong analysts at CICC.

“Facing uncertainty in US-China trade, it is possible that China may take the opportunity to release the pressure in advance, allowing the yuan to weaken somewhat as the dollar rises.”

They noted that the yuan was mostly stable relative to a basket of currencies.

“Longer term, we do not expect large yuan depreciation, especially considering bilateral trade concerns,” the analysts said.

CICC has forecast gradual depreciation in the yuan to 6.98 against US dollar by the end of 2017.

Meanwhile analysts at Daiwa reiterated their view of sharper depreciation in the Chinese currency, forecasting the yuan at 7.50 per dollar by year end.

Market watchers will be tuning in to Federal Reserve chair Janet Yellen’s speech on Thursday for clues as to the direction of interest rates in the wake of the presidential election result.

“A more aggressive Fed lean will see the dollar rocket higher,” said Stephen Innes, senior trader at Oanda.“While a less aggressive tack will not necessary spoil the party, it will certainly stall dollar momentum.”