Yuan Analysis and Talking Points
- PBoC finally stepped in to support the Yuan
- Yuan declines will likely continue ahead of US tariffs
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Yuan Devaluation?
Over the past month, the Chinese Yuan has fallen at a rapid rate amid the backdrop of a tit-for tat trade spat between the US and China, plunge in Chinese equities, which are in bear market territory after sliding 20% from the January peak. Subsequently, the Yuan has declined by as much as 4%, marking one of its largest monthly losses on record, which in turn has fuelled speculation that officials are allowing for a devaluation in CNY, particularly ahead of the additional tariffs on $34bln of Chinese goods that will be impose by the US on July 6th.
PBoC Finally Steps In
Following the weakest CNY (Onshore Yuan) fix since August 2017, which took USDCNH (Offshore Yuan) above 6.7000, the PBoC finally stepped in to provide both verbal and actual intervention. As a result, this led to a recovery in the Yuan with USDCNY closing at around 6.65. Both the PBoC Governor and Deputy Governor stated that China will keep the Yuan basically stable and at a reasonable and balanced level, having blamed the weakness on the USD strength and external uncertainties. This verbal intervention had also been likely backed up by actual intervention in which reports surfaced that major state-owned backs had swapped yuan for dollars in the forward market and then selling some of them into spot market, thus support the yuan.
Yuan Declines to Persist
However, given that the PBoC has yet to confirm such intervention and will investors recently turning bearish on the Chinese Yuan for the first time in over a year, this suggests that weakness could persist with the recent recovery seen as only temporary. Additionally, if the CNY settles at lower levels, this in itself could stoke up the trade dispute with the US with China being named a currency manipulator.
USDCNH PRICE CHART: 1-HOUR TIME FRAME (June 21- July 03)
--- Written by Justin McQueen, Market Analyst
To contact Justin, email him at Justin.mcqueen@ig.com
Follow Justin on Twitter @JMcQueenFX
