$CNH, $CNY, $USD
FLASH: China will not use its currency as a tool in its dispute with the US
China took steps to slow it RMB Yuan’s dive, as the effects of Monday’s plunge weighed on financial markets.
The People’s Bank of China (PBoE) set the daily currency fixing stronger than analysts expected and announced the planned sale of RMB Yuan-denominated bonds in Hong Kong. The moves, which came hours after the US Treasury labeled the country a currency manipulator, helping to drive the offshore Yuan (CNH) higher.
A weak fixing Monday had helped send the RMB Yuan past 7 to the USD for the 1st time since 2008, triggering a wave of selling across markets from Asia to the US.
The currency’s fall brought back memories of the capital flight in Y 2015 that spurred China to spend more than $500-B of its reserves. News that The Trump Administration has formally labeled China a currency manipulator is adding pressure on Chinese authorities.
“The PBoC is sending signals that it would like to mitigate Yuan depreciation,” said the head of Asia macro strategy at Westpac Banking Corp/Singapore. “The offshore Yuan had faced resistance around 7.1 intra-day a few times. I expect it to hover around this level near term.”
The PBoC set its daily reference rate at 6.9683 per USD, stronger than the 6.9871 level forecast in survey of 19 traders and analysts.
The Yuan was 0.1% lower at 7.0569 at 10:44a local time Tuesday, after falling about 1.5% the Monday. The offshore rate, which is less influenced by Beijing, rose 0.1% to 7.0897.
China’s central bank will sell 30-B Yuan ($4.2-B) of bills in Hong Kong on 14 August according to a PBoC statement Tuesday. The move typically drains offshore liquidity making it more costly to short the Chinese currency.
The announcement came after Yi Gang, governor of the central bank, said Monday that “the Yuan will remain a strong currency in spite of recent fluctuations.” He also said China will not use its currency as a tool in its dispute with the US.
Tuesday, the PBoC had the fixing stronger than 7 to correct herding behavior seen Monday.
Beijing is sending a message to the US, “we are not manipulating the currency weaker”.
If markets drive USD/CNH rate even higher and out of hand, analysts I spoke to do not believe the PBoC will sit and doing nothing.
Wall Street reacted quickly Monday’s to the RMB Yuan’s sharp depreciation, with currency analysts moving to cut their Yuan targets.
Strategists at Bank of America Corp. lowered their year-end forecast to 7.3 per USD from 6.63, based on their expectation that China wants a weaker currency to soften the impact of higher tariffs. Citigroup Inc. said the Yuan may fall to 7.5 if tensions escalate further.
“Trade and currency wars are escalating by the day,” said a currency strategist at DBS Group Holdings Ltd., adding the Yuan and other Asian exchange rates will drop further. “Naming China a currency manipulator could open the door for US tariffs to eventually increase to more than 25% on Chinese goods.”