China's yuan drops to new decade low, psychologically key 7 per dollar level in sight

The Chinese currency has weakened about 9 per cent over the past six months, moving closer to the 7 per dollar level which was last hit during the global financial crisis in 2008.
The Chinese currency has weakened about 9 per cent over the past six months, moving closer to the 7 per dollar level which was last hit during the global financial crisis in 2008.PHOTO: REUTERS

BEIJING (REUTERS) - China's yuan hit a fresh 10-year low against the US currency on Tuesday (Oct 30), pushed lower by worries about slower growth in the domestic economy and a sharp escalation in the US-China trade war.

The Chinese currency has weakened about 9 per cent over the past six months, moving closer to the 7 per dollar level which was last hit during the global financial crisis in 2008. The recent steep decline has shifted market focus to the question of whether Chinese authorities will defend the psychologically important level, and to what extent they would do so.

"If the authorities are mindful of the potential impact on sentiment and capital flows, they have to gauge the potential negative impact on sentiment and overshooting beyond 7 if the level is broken," said Frances Cheung, head of Asia macro strategy at Westpac in Singapore. She expects the central bank may want to slow any downside moves and said it was uncertain in longer-term if there were any particular levels at which they would defend at all cost beyond this.

Prior to market opening, the People's Bank of China (PBOC) set its official yuan midpoint at 6.9574 per dollar, 197 pips, or 0.28 per cent, weaker than the previous fix of 6.9377. The lower fix came as the dollar firmed against its rivals, supported by a safe haven bid amid fresh US-China trade worries. Bloomberg reported that the United States is preparing to announce tariffs on all remaining Chinese imports by early December if talks next month between presidents Donald Trump and Xi Jinping falter.

Tuesday's fixing was the lowest guidance since May 21, 2008.

"The news that the US is threatening a new round of tariffs has weighed on market sentiment, but I don't know how to define a meeting as a 'failure'," Zhou Hao, senior emerging market economist at Commerzbank in Singapore, said of the planned Trump-Xi meeting. "So the market is just testing the bottom line of the PBOC, and the PBOC is still passively defending its currency."

Zhou expects the Chinese authorities to keep the currency stable at around or firmer than 7 per dollar. In the spot market, the onshore yuan opened at 6.9600 per dollar and fell to a low of 6.9724 at one point in early trade, the weakest level since May 20, 2008. As of midday, the onshore yuan was changing hands at 6.9688, 68 pips weaker than the previous late session close and 0.16 percent softer than the midpoint. Its offshore counterpart traded at 6.9739 per dollar at midday.

 

Three traders told Reuters that major state-owned Chinese banks were seen swapping yuan for dollars in forwards in morning trade, but there was no immediate evidence of dollar selling in the spot market. Two traders said they suspected the state-run banks were stockpiling dollars for future use, which means they could sell the dollars in spot market to prop up the yuan at critical levels if needed. China's biggest state-owned banks are widely believed to often act on behalf of the PBOC in the foreign exchange market.

The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 per cent from official midpoint rate it sets each morning.