August 5, 2019 / 3:16 AM / 3 months ago

Analysts' View: Yuan drops through 7/dollar as Sino-U.S. trade war escalates

SINGAPORE (Reuters) - China’s yuan tumbled to the weaker side of the key 7-per-dollar threshold on Monday, hitting its weakest since 2008, against the backdrop of a sharp escalation in the protracted U.S.-Sino trade war.

U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration

The drop in the yuan CNY=CFXS to a low of 7.0240 per dollar triggered selling in regional stock markets, the offshore yuan, Indonesian rupiah, the South Korean won as well as other currencies.

On Thursday, U.S. President Donald Trump abruptly decided to slap 10% tariffs on $300 billion in Chinese imports, stunning markets and ending a month-long trade truce. China vowed on Friday to fight back.

Here are analysts’ comments on the move:

ROB CARNELL, CHIEF ECONOMIST AND HEAD OF RESEARCH FOR ASIA-PACIFIC, ING, SINGAPORE:

“We’re waiting to see the next yuan fixing. If they try to push back against today’s move then you could probably conclude that China doesn’t want to see a breach of 7 level. If they don’t, it could mean that yuan weakness is part of their response.

“What’s happening in Hong Kong is also causing a high degree of anxiety and uncertainty which could be bearing on prices. We’re seeing a lot of risk averse moves.

“We are very uncertain about what’s going to happen next. We’ll wait for tomorrow to see what happens tomorrow.

“What has taken the market by surprise is that nobody anticipated that President Trump would slap tariffs on China within 24 hours of their trade talks. (I) don’t think any of us had imagined how quickly President Trump would slap on more tariffs.

“This makes it very hard for China to decide what it needs to do next. You don’t really know if the people you are talking to matter and it turns out they don’t. So, you don’t want to make concessions and then get tariffed anyway. Then you’re losing both ways.”

BEN LUK, SENIOR MULTI-ASSET STRATEGIST, STATE STREET GLOBAL MARKETS:

“Allowing for slightly more weakness in the yuan could help mitigate some of the risk in the manufacturing sector, as operating margins continue to shrink. But using the Chinese yuan as part of the trade war creates more harm than good for the economy.

“It not only induces more fear on the currency, which could lead to previous episodes of capital outflows, while dumping U.S. Treasuries would also exert additional pressure on the CNY.”

MASASHI HASHIMOTO, SENIOR CURRENCY ANALYST, MUFG BANK, TOKYO:

“This could well be the biggest moment for the yuan this year. The impact of the U.S.-China trade is turning out to be very big.

“Looking at the mid-point, the People’s Bank of China is trying to stem the yuan’s fall. The PBOC doesn’t look like it is trying to use a weaker yuan to counter U.S. trade pressure. The yuan’s fall seems to be stemming from panicky selling.”

CLIFF TAN, EAST ASIAN HEAD OF MARKETS RESEARCH, MUFG, HONG KONG

“We have had a view that generally going beyond 7 for the yuan is just a matter of time.

“I think what happened today was that the fix was a little bit weaker than what the market had expected. And given liquidity is low because of Hong Kong, it gave markets a good excuse to push beyond 7.

“The key is that we have broken 7 and the authorities could have come in the way but they didn’t.

“The second point is that I want to disagree that China wants to weaponise its currency in the trade war. I don’t see evidence there. They don’t want to infuriate Trump any further.

“We are seeing strong sell-off pressures in the Korean won which is quite sensitive to the Sino-U.S. trade war. The Taiwanese dollar is falling sharply too.

“We are seeing that people are afraid today that the Chinese authorities will allow the yuan to weaken. However, I’m not expecting there will be a bout of buying dollar/renminbi beyond 7.10.”

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE:

“My hunch is this is probably intentional. The timing after Trump announces tariffs makes sense. China doesn’t have much options to retaliate on tariffs.

“Other options like selling Treasuries or restricting metals exports are not powerful tools. The currency is the most powerful tool.

“Before China was intervening to prevent capital outflows, but now it has a much better grip on capital flows.

“They were intervening because of the impact on trade negotiations, but the fact that they have allowed the yuan to go past 7 shows they have sort of given up.

“We want to see how long the yuan stays past 7 to see if this is just a warning shot. If it stays past 7 it could weaken significantly further.”

RAY ATTRILL, HEAD OF FOREX STRATEGY, NATIONAL AUSTRALIA BANK, SYDNEY:

“The CNH market decided to test the 7 level early on, but the CNY fixing didn’t offer any strong protest. I don’t know how much this is exacerbated by Hong Kong factors. To what extent is the strike in Hong Kong impairing liquidity I don’t know, but that will be relevant to volatility.

“I can’t see any signs the Chinese authorities are trying to squeeze liquidity in the HIBOR market. Our view is that rather than overtly weaponising the currency they would simply not resist a market driven move.

“Everything is selling off right now. For the time being, the Aussie and kiwi are going to trade with reference to emerging market FX. They will remain the markets’ preferred risk proxies. We have no reason to expect any cessation in selling unless we see any strong action to defend any CNY or CNH weakness.

“Our working assumption is that we are unlikely to see any meaningful resolution to the trade dispute anytime soon. Maybe we need a repeat of the 2018 mini crash before Trump blinks. It’s now unrealistic to see that the current negotiating tactic is likely to bear fruit.”

EI KAKU, CURRENCY STRATEGIST, NOMURA SECURITIES, TOKYO:

“On Friday, the PBOC set the yuan midpoint slightly weaker than our theoretical model, so I had an inkling that the PBOC’s stance on the yuan might have changed.

“Today, the fixing was slightly stronger than we had expected but still it was the first time it was set above 6.90.

“So I would think market players took that as a sign that the PBOC is ready to let the yuan weaken. It is not surprising if Beijing thinks they should weaken the yuan to negotiate with Trump when the U.S. side is maxing out on tariffs. We expect the yuan to weaken to 7.2 this quarter.”

CARY YEUNG, HEAD OF GREATER CHINA DEBT, PICTET ASSET MANAGEMENT

“The tariff to be imposed by the U.S. will have some impact on China’s economy, but policy tools are widely available to Beijing to protect any significant downside. We expect Chinese rates, which are primarily driven by fundamentals, to trade in a range bound manner.”

CHRISTY TAN, HEAD OF MARKETS STRATEGY, ASIA, NATIONAL AUSTRALIA BANK

“Previously this wasn’t the policy preference...(but) tariffs measures are no longer a choice as China ran out of stuff from the U.S. to impose tariffs on. Non-tariff measures and the currency have become policy options.

“There are costs to allowing the currency to weaken too far, too much, and too fast. This will come in the form of capital flight. Chinese authorities are aware of that. The PBOC has come out and issued comments. There is still a preference to maintaining stability.”

GAURAV GARG, STRATEGIST, CITI, SINGAPORE:

“While this is very different from the August 2015 step devaluation of the renminbi, the move of USDCNY past 7 is likely to weigh on broader risk appetite and can drive EM Asia FX weaker.

“This headline-grabbing move in USDCNY past 7, which can potentially weaken CNY versus its trading-partner currencies, may further complicate the U.S.-China negotiations. This decision to unleash USDCNY could be in response to the abrupt blow to the U.S.-China tariff truce late last week when U.S. President Trump announced 10% tariffs on remaining US$300 billion of China’s exports to the U.S.

“The move past 7 in USDCNY is likely to be compared with the Aug’15 step devaluation of the renminbi, even as the nature of the two events is very different. Rather than an abrupt move up in USDCNY with fears of a subsequent large move lurking, this move is more orderly and has been a point of discussion for long. Moreover, the well-behaved CNY forward points have provided – and continue to provide – market participants with genuine FX liabilities with reasonable avenue to hedge. Meanwhile, measures to discourage speculative pressures on renminbi and control on non-institutional capital outflows persist.

“Well behaved and stable price action of CNY/CNH for most of this year served as an important anchor for EM Asia FX during times of risk-aversion and USD strength. With this break higher in USDCNY, EM Asia FX has lost this anchor, and subsequent risk aversion may see Asian currencies weakening further.”

FITCH RATINGS

“New U.S. tariffs on Chinese imports represent an escalation of U.S. trade protectionism beyond our baseline forecasts.

“As part of a broader trend that includes increased tariffs and greater trade policy uncertainty, the move highlights a significant threat to global growth. On their own, the tariffs may have a limited direct impact on near-term growth and policy responses could mitigate these effects.

“Prospects for resolving the U.S.-China dispute remain uncertain, as China may at some point respond with non-tariff measures, for example, and further punitive tariffs are an adverse supply shock with damaging effects on certainty and business confidence that monetary easing may struggle to offset.

Reporting by Hideyuki Sano & Stanley White in TOKYO, Noah Sin in HONG KONG, Swati Pandey in SYDNEY; Editing by Shri Navaratnam and Jacqueline Wong

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