China’s currency hits 5-month low as trade fight with U.S. intensifies

Blame trade-war worries, not intervention by China’s central bank, for recent weakness in the yuan, analysts said Monday.

The Chinese currency hit a five-month low Monday, though volumes were likely impacted by the Dragon Boat Festival holiday, leaving the onshore yuan  down 0.1%. The offshore yuan  came off by 0.3%, with one dollar last fetching 6.4471 and 6.4593 yuan, respectively.

The onshore currency is pegged to the U.S. currency and trades in a strictly defined range, though the offshore traded currency moves a bit more freely and in line with market dynamics. This means that any remarkable move in the yuan can prompt speculation about the involvement of the People’s Bank of China.

Generally speaking, a weaker currency makes a country more competitive on the global market, but central banks tend to step in if a selloff — or the opposite thereof — gets out of control.

The PBOC was clearly not trying to push its currency down, according to Stephen Gallo, European head of FX strategy at BMO, saying “on a broad basis the yuan still does not show a picture that represents a clear devaluation trend. This is not anything remotely like 2015.”

In fact, as Asian emerging market currencies have sold off against a broadly stronger dollar in recent weeks, the yuan remained remarkably stable in comparison, which “might suggest that policy makers have been intervening to support it,” said Oliver Jones, economist at Capital Economics.

“It has weakened by only 2% against the dollar since EM currencies generally began to slide in mid-April,” he said, adding that many other EMs dropped 5% or more, “and it has strengthened by about 1% in trade-weighted terms.”

“But the latest FX reserves data actually indicate that the PBOC remained on the sidelines in May,” as there hadn’t really been much need for the central bank to step in to support it yet, he said.

Just last week, China’s central bank’s Deputy Gov. Pan Gongsheng said that China is looking to boost the market’s role in the yuan exchange rate mechanism and will increase transparency of the yuan fixing.

For now, the yuan depreciation seems to hail from a different direction: trade.

The Trump administration announced new import tariffs on $50 billion of Chinese goods last week, and China has vowed to retaliate with its own measures, contributing to pressure on a range of emerging market currencies, particularly in Asia.

“The Asian exporters have been getting hit on the currency front since the Trump/Kim summit,” said Brad Bechtel, managing director in FX at Jefferies, referencing the U.S.-North Korea summit in Singapore last week and pointing at the likes of the U.S. dollar/Korean won currency pair which “blew through the 200 day moving average last week, which was followed up by a move through the year to date highs overnight.” The New Taiwan dollar  also hit a fresh 2018 low versus the greenback on Monday.

In the year so far, the won has fallen 3.6% against the buck, while the Taiwan dollar dipped 1.7%, according to FactSet.

The yuan, has come down too, and as an export nation, a cheaper currency makes China more competitive on the global market. But in the year-to date, both onshore and offshore, is still up almost 1%, FactSet data shows. Back in January, the yuan hit a 2 1/2-year high, and even as it has retreated, its 2018 performance still looks stronger than that of its peers. At least for now.

The offshore yuan was testing its 200-day-moving-average, and it felt “like we should be 6.500 soon and perhaps 6.600 shortly thereafter. This will add to dollar strength,” Bechtel said, and in turn drag the yuan down further.

In fact, even with no intervention from the PBOC and irrespective of the trade spat between the U.S. and China, the general trend of a weaker yuan likely won’t come to an end until the Federal Reserve’s tightening cycle is wrapped up, Jones said.

The Fed, which last raised rates last week, is expected to complete up to two more hikes this year and another three in 2019, though market participants are beginning to suggest that might be the end of it. Raising interest rates commonly supports the local currency.