Yuan touches 11-year low
The line in the sand had not been so after seeing the yuan breach the 7.0 level against the greenback going into the fresh week. Amid the escalating trade tensions, this may not be the last of yuan weakness we will be seeing.
PBOC allowing the yuan to weaken
While the equity markets had been hard hit following President Donald Trump’s latest tariffs threat to implement 10% tariffs on another $300 billion worth of Chinese imports from September 1, the FX market had been the one rumbling on Monday with the surprise depreciation of the yuan. Fixing for USD/CNY was seen at the highest level since December 2019 at 6.9225, surpassing the consensus.
The perception that the People’s Bank of China (PBOC) had little interest to defend the yuan amid the on-going trade spat thus allowing the yuan to weaken with the fixing saw greater selling coming through. More importantly, this had also been viewed as a ‘retaliatory’ move by China after having curbed excessive yuan weakness in past instances out of goodwill. The latter view had perhaps been further cemented by the fact that the Chinese authorities had called for a halt of US agriculture products by state buyers, weighing on Asia equities and US futures alike on Monday.
All the above said, the fact of the matter is that we have now seen USD/CNY trading past the $7.0 psychological level. The question will be whether this knee-jerk reaction will continue or see to some retracement moving forth.
Watch policy support
As far as the widening of the spread between the offshore and onshore yuan is suggesting, the market forces are clearly yearning for further yuan weakness. This PBOC had warned against excessive speculation but the bearish bias may remain in light of greater policy support that could come with increased growth risks from further tariffs slapped on exports to the US. Not to mention, the US-China trade tension also looks to have more room to deteriorate before it gets better even if it is not in either sides’ interest. With the breach, USD/CNH is expected to end the year above 7.0 and potentially at a higher level particularly if further rate cuts are delivered. The latter is also now the market expectation with the trade escalation. Short-term volatility should not be ruled out if we do see improvements in sentiment on any aid from the fiscal end.
Source: IG Charts
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Start trading forex today
Trade the largest and most volatile financial market in the world.
- Spreads start at just 0.6 points on EUR/USD
- Analyse market movements with our essential selection of charts
- Speculate from a range of platforms, including on mobile
Live prices on most popular markets