China's yuan falls to fresh 10-year low as trade war bites

China's yuan fell to a fresh 10-year low against the dollar, pressured by worries about slowing economic growth and a potential sharp escalation in the Sino-US trade war.

The onshore yuan ended domestic trading at 6.9613 per dollar at 0830 GMT, the weakest such close since May 20, 2008.

Against the Singapore dollar, the Chinese currency traded at an intraday low of 5.0409 before gaining back some ground.

The Chinese currency has lost more than 6.5 per cent of its value to the dollar since the beginning of this year, and is down 10 per cent, when the first set of tit-for-tat tariffs in the US-Sino trade war were announced.

It is nearing the closely watched 7 per dollar level, which was last hit during the global financial crisis. The market's focus has now shifted to whether the central bank will firmly defend that level or let the yuan weaken further, and how much.

"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 the longer-term if there were any particular levels at which they would defend at all costs beyond this.

Prior to the 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 Sino-US 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. It was also 87 pips weaker than a Reuters estimate of 6.9487.

"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.

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.

The operation was mainly conducted in the one-year tenor of dollar/yuan swaps, the traders said.

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 offshore yuan traded at 6.9675 per dollar as of 0830 GMT.

Re-disseminated by The Asian Banker from channelnewsasia.com

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