Until Boris Johnson’s shocking announcement moments ago that he would not run for Tory leadership or the UK premiership, the key macro event overnight was a report out of Reuters that China’s central bank is willing to let the yuan fall to 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5 percent.
The report promptly sent the offshore yuan tumbling, sliding much as 0.72% to 6.7021 per dollar, the lowest since January 11, however it promptly recovered losses following significant PBOC intervention in the open market.
In a longer-term context, the swoon in the CNH matched the lows from January.
As Reuters adds, the yuan was already trading at its lowest level in more than five years, so the central bank will aim to ensure a gradual decline for fear of triggering the sort of capital outflows that shook the economy earlier this year and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions.
A surprise devaluation of the yuan last August sent global markets into a spin on worries the world’s second-biggest economy was in worst shape than Beijing had let on, prompting massive capital outflows as investors sought safe havens overseas.
“The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter.”The Brexit vote was a big shock. The market volatility may last for some time.”
The yuan has dropped to the new lows following Britain’s vote to leave the European Union and so far the central bank has stood aside from intervening, suggesting it is happy with the currency’s depreciation. Other emerging market currencies have also fallen, but the yuan is the weakest major Asian currency against the dollar this year.
The yuan hovered near 6.64 per dollar on Thursday, just off the 5-1/2-year intraday lows and bringing its fall so far this year to about 2.3 percent.
Currency dealers said the strength of the dollar and the weakness in economic growth, which hit a 25-year low in 2015, justified a decline in the yuan. But investors and trading partners will be wary of any significant decline after August’s devaluation and a sharp decline in the currency over a matter of days in January that analysts said was engineered by the central bank.
In the past decade, China has also faced criticism from Western lawmakers who say it held back the appreciation of the yuan.
China’s premier, Li Keqiang, has repeatedly said China has no intention to stimulate exports via a competitive currency devaluation. The Foreign Ministry said on Wednesday the exchange rate was not the reason for unbalanced trade with the United States, which runs a goods and services trade deficit with China. However, the sources acknowledged the diplomatic risks of a steep fall in the yuan.
“The pressure from the United States could rise if China allows sharp depreciation,” said a government source.
Others are watching closely and ready to respond as the currency wars accelerate as China has the biggest global exports market share of any country since the United States in 1968, so the yuan’s exchange rate acts as a bellwether for other exporting countries and is a cause of concern for some.
“We are concerned at how quickly the yuan is falling and in turn how the won seems to be tracking its movements,” said a finance ministry official in South Korea, a major exporter that competes with China in textiles, electronics and petrochemicals among other sectors.
Japan was less concerned: a person familiar with Japan’s currency diplomacy, was less concerned, saying the yuan’s decline didn’t seem out of line considering the dollar’s strength. “I don’t think Japan has much to complain about,” this official said. Although Japan rivals China in exports including electronics and heavy machinery Tokyo is struggling with its own currency dilemma of how to contain a sharp rise in the yen following the Brexit vote last week.
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No matter the overnight volatility, however, China’s yuan has already seen the biggest quarterly fall on record after hitting a six-month low. It stabilizied becasue becuse as noted above, the CNH promptly recouped losses after at least two Chinese banks sold USD/CNY after 3pm local time, according to one FX trader in the region, following the Reuters report. The USD/CNY quickly dropped to around 6.6430 after banks’ selling having hit as high as 6.6550.
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