Yuan tumbles to fresh five-and-half-year low against dollar, reaching critical 6.7 level

PUBLISHED : Monday, 18 July, 2016, 11:13am
UPDATED : Monday, 18 July, 2016, 11:05pm

The Chinese yuan hit a new five and a half year low on Monday, breaking through the critical technical level of 6.7 per dollar, as the central bank set the reference rate at the lowest level since October 2010.

The drop in the yuan comes as recent data on surging loan growth and capital flight overshadows figures showing better-than-expected economic growth for the second quarter.

On Monday, the onshore yuan ended at 6.6987 per dollar at 4.30pm – its official closing price although trading continues until 11.30pm – 122 basis pips or 0.18 per cent weaker from the closing on Friday. It then fell to 6.7 per dollar at around 5pm, its weakest level since September 2010. The fall came after the People’s Bank of China set the yuan reference rate at 6.6961 against the US dollar, down 156 basis points or 0.23 per cent from Friday’s fixing, almost reaching its lowest level in six years.

The offshore yuan in Hong Kong strengthened slightly, up 23 pips or 0.03 per cent to 6.7002 against the greenback at the same time.

“We think the yuan will continue to face depreciation pressure, as growth slows in China and the US dollar strengthens on flight-to-safety,” said Aidan Yao, senior emerging Asia economist at AXA Investment Managers. “While the government has improved on its management of the capital account, the risk of accelerating outflows cannot be discarded completely.”

We think the yuan will continue to face depreciation pressure, as growth slows in China and the US dollar strengthens on flight-to-safety
Aidan Yao, AXA Investment Managers

China on Friday reported 6.7 per cent gross domestic product growth for the second quarter, matching the first quarter and beating expectations of traders and economists. Separately, official data showed new loans issued by domestic banks in June reached 1.3 trillion yuan (HK$1.5 trillion), beating market expectations of 1 trillion yuan.

“It is not all a bed of roses. Economic surprises came on the back of surging bank loans, which illustrates that the mainland has little intention of addressing leverage issues which are threatening to balloon out of control, as the economy continues to slow down,” Stephen Innes, senior trader at Oanda Asia Pacific said.

China appears unfazed by the frenzied pace of new loans and if the economy continues to sour, as expected post-Brexit, both a credit and asset-price bubble may be ready to pop, Innes said.

On the international markets, the British pound extended its strength as the Bank of England last week opted to maintain its interest rate unchanged at 0.5 per cent. The pound rose 0.58 per cent to US$1.3268 on Monday afternoon.

“The sterling spiked following the BOE’s unexpected decision but could trade lower once investors digest the reality of a future rate cut....further declines in the sterling could be common place. From a technical standpoint, a breakdown below 1.31 could open a path towards 1.30.” Lukman Otunuga, research analyst at FXTM, wrote in a note.

The yen continued to weaken, down 0.72 per cent to 105.59 per dollar, as former Federal Reserve chief Ben Bernanke’s meetings with Japanese officials propelled expectations that further easing measures were around the corner.