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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

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