Yuan sinks most in over 3 years after China sets currency mid-point at weakest level in 2½ months

The yuan has become part of the negotiations after the US raised concern that Beijing is deliberately depreciating its currency. Analysts expect any potential agreement will include a clause on currency stability.
The yuan has become part of the negotiations after the US raised concern that Beijing is deliberately depreciating its currency. Analysts expect any potential agreement will include a clause on currency stability.PHOTO: REUTERS

SHANGHAI (REUTERS, BLOOMBERG) - China's central bank lowered its official yuan midpoint to 6.7334 per dollar on Monday (May 6), the weakest level in 2½ months, after a sudden escalation in US-China trade tensions, sending the currency sinking the most in more than three years.

Monday's midpoint was 58 pips, or 0.09 per cent, weaker than the previous fix of 6.7286 and was the softest since Feb 20.

The offshore yuan tumbled as much as 1.3 per cent, the most since January 2016, before paring losses to trade 1 per cent lower at 6.8055 per US dollar as of 9:35am in Hong Kong. The onshore currency - which hadn't traded since April 30 - sank 0.9 per cent, the most in nearly three months, to 6.7949.

Trump on Sunday increased pressure on China to reach a trade deal by announcing he will hike US tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon. China, in response, is considering canceling a planned Washington trip this week, according to people familiar with the matter.

The move marked a major escalation in trade tensions between the world's two largest economies and a shift in tone from Trump, who cited progress in talks as recently as Friday.

Traders rushed on Monday to protect against further losses in the yuan. A gauge measuring demand to buy bearish contracts on the offshore yuan surged the most since early 2018 on Monday.

The currency had been almost flat against the dollar since the end of February on speculation that the world's two largest economies were edging closer to a trade deal. The yuan has become part of the negotiations after the US raised concern that Beijing is deliberately depreciating its currency. Analysts expect any potential agreement will include a clause on currency stability.

The offshore yuan's three-month risk reversal jumped 43 basis points, the most since February 2018, to 0.67 per cent. While this reflects higher demand for short-yuan wagers in the options market, the level is low compared to the aftermath of the country's 2015 depreciation. That suggests traders are not yet in panic mode.