Yuan drops through 7 per dollar as Sino-US trade war escalates

China’s yuan tumbled to the weaker side of the key 7-per-dollar threshold on Monday, hitting its weakest since 2008, against the backdrop of a sharp escalation in the protracted US-Sino trade war.

The drop in the yuan to a low of 7.0240 per dollar triggered selling in regional stock markets, the offshore yuan, Indonesian rupiah, the South Korean won as well as other currencies.

On Thursday, US President Donald Trump abruptly decided to slap 10 per cent tariffs on $300 billion in Chinese imports, stunning markets and ending a month-long trade truce. China vowed on Friday to fight back.

According to the analysts, “We’re waiting to see the next yuan fixing. If they try to push back against today’s move then you could probably conclude that China doesn’t want to see a breach of 7 level. If they don’t, it could mean that yuan weakness is part of their response.

“What’s happening in Hong Kong is also causing a high degree of anxiety and uncertainty which could be bearing on prices. We’re seeing a lot of risk averse moves.

“We are very uncertain about what’s going to happen next. We’ll wait for tomorrow to see what happens tomorrow.

“What has taken the market by surprise is that nobody anticipated that President Trump would slap tariffs on China within 24 hours of their trade talks. (I) don’t think any of us had imagined how quickly President Trump would slap on more tariffs.

“This makes it very hard for China to decide what it needs to do next. You don’t really know if the people you are talking to matter and it turns out they don’t. So, you don’t want to make concessions and then get tariffed anyway. Then you’re losing both ways.” “Allowing for slightly more weakness in the yuan could help mitigate some of the risk in the manufacturing sector, as operating margins continue to shrink. But using the Chinese yuan as part of the trade war creates more harm than good for the economy.

“It not only induces more fear on the currency, which could lead to previous episodes of capital outflows, while dumping US Treasuries would also exert additional pressure on the CNY.” “This could well be the biggest moment for the yuan this year. The impact of the US-China trade is turning out to be very big.

“Looking at the mid-point, the People’s Bank of China is trying to stem the yuan’s fall. The PBOC doesn’t look like it is trying to use a weaker yuan to counter US trade pressure. The yuan’s fall seems to be stemming from panicky selling.” “We have had a view that generally going beyond 7 for the yuan is just a matter of time.

“I think what happened today was that the fix was a little bit weaker than what the market had expected. And given liquidity is low because of Hong Kong, it gave markets a good excuse to push beyond 7.

“The key is that we have broken 7 and the authorities could have come in the way but they didn’t.

“The second point is that I want to disagree that China wants to weaponise its currency in the trade war. I don’t see evidence there. They don’t want to infuriate Trump any further.

“We are seeing strong sell-off pressures in the Korean won which is quite sensitive to the Sino-US trade war. The Taiwanese dollar is falling sharply too.

“We are seeing that people are afraid today that the Chinese authorities will allow the yuan to weaken. However, I’m not expecting there will be a bout of buying dollar/renminbi beyond 7.10.” “My hunch is this is probably intentional. The timing after Trump announces tariffs makes sense. China doesn’t have much options to retaliate on tariffs.

“Other options like selling Treasuries or restricting metals exports are not powerful tools. The currency is the most powerful tool.

“Before China was intervening to prevent capital outflows, but now it has a much better grip on capital flows.

“They were intervening because of the impact on trade negotiations, but the fact that they have allowed the yuan to go past 7 shows they have sort of given up. “We want to see how long the yuan stays past 7 to see if this is just a warning shot. If it stays past 7 it could weaken significantly further.” “The CNH market decided to test the 7 level early on, but the CNY fixing didn’t offer any strong protest. I don’t know how much this is exacerbated by Hong Kong factors. To what extent is the strike in Hong Kong impairing liquidity I don’t know, but that will be relevant to volatility.

“I can’t see any signs the Chinese authorities are trying to squeeze liquidity in the HIBOR market. Our view is that rather than overtly weaponising the currency they would simply not resist a market driven move.

“Everything is selling off right now. For the time being, the Aussie and kiwi are going to trade with reference to emerging market FX. They will remain the markets’ preferred risk proxies. We have no reason to expect any cessation in selling unless we see any strong action to defend any CNY or CNH weakness.

Reuters