Yuan weakens towards decade low
(26 October 2018 – China) The Chinese Yuan hit a fresh two year low against the US Dollar as weaker-than-expected central bank fixing intensified market views that Chinese authorities would allow a further depreciation of the currency.
The yuan has lost over six percent against the greenback so far this year. China’s Yuan jumped Friday afternoon after sliding toward its weakest in a decade and close to a key level of 7 per dollar. The currency has been pressured by rising trade war rhetoric with the US and expectations of further easing by the central bank. The yield spread between Chinese and US government bonds has neared its tightest point since April 2011. Chinese Premier Li Keqiang said at a conference Friday that China won’t engage in competitive devaluation of the Yuan. The US has openly criticised China for not disclosing its FX market interventions. Treasury Secretary Steven Mnuchin said there could be a change in methodology for determining whether countries are gaming their currencies.
Authorities maintain that China will be able keep its currency stable due to the country's healthy economic fundamentals and ample foreign exchange (FX) reserves, Pan Gongsheng, a vice governor of the People's Bank of China (PBoC), stated “The central bank will adopt macro-prudential measures to stabilize market expectations and take targeted measures to cope with market risks. The fundamentals of China's economy are healthy, the macro leverage ratio is basically stable, and the financial and financial risks are generally controllable. China has sufficient foreign exchange reserves. These factors will provide a fundamental support for the renminbi (Yuan) exchange rate to remain basically stable". “We have dealt with short-sellers of the yuan a few years ago, and we are very familiar with each other,” Pan said. “I think we both have vivid memories of the past.” Pan also said the Yuan is stable compared with other currencies and that its recent weakness has been driven by factors including US. rate hikes, trade tension and a stronger dollar.
“I expect the 7 level to hold as I do not think the Chinese authorities want to see further yuan weakness. A move past that milestone may cause further outflow pressure, and potentially see the recent strong foreign inflows into bonds and equities slow” said Khoon Goh, head of research at ANZ Singapore.
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