China cenbank blames yuan moves on dollar rise, external uncertainty

Marco Green
July 6, 2018

Chinese currency and equity markets have been on tenterhooks ahead of July 6, when U.S. tariffs on $34 billion worth of Chinese goods are set to kick in.

China's state-owned banks have reportedly been buying USA dollars in forwards on behalf of the central bank (PBOC) and immediately selling them into the spot market to support the yuan.

The question is how much further, and how quickly, the yuan might fall. "It generates a degree of instability in the market simply by virtue of its scale".

The yuan has retreated some 3.7% against the USA dollar over the past three weeks.

The Aussie dollar came off a 1-1/2-year low of $0.7311 plumbed overnight, fetching $0.7368.

Short-covering rallies should not be confused with trend reversals, and provided traders continue to view escalating trade tensions will reduce the United States trade deficit, thereby benefiting the dollar, gold will continue to remain out of favour.

Sydney added 0.5 percent, Seoul rose 0.3 percent and Wellington jumped more than one percent.

RBA Governor Philip Lowe said "one uncertainty regarding the global outlook stems from the direction of worldwide trade policy in the United States", cautioning that the recent U.S.

There are particular fears for Shanghai, which has plunged more than 20 percent from its January high as the colossal Chinese economy is already showing signs of slowing, even before Donald Trump's threatened tariffs kick in.

The outlook for Sino-U.S. trade relations was further clouded on Tuesday by Washington's moves to block China Mobile from offering services in the U.S. and news that growth in China's exports to the United States has slowed significantly this year.

Energy stocks have been boosted by Brent crude's rise past $78 a barrel, McPherson noted. Europe's tech and energy sectors rose 0.5 and 1 percent respectively.

Beijing will retaliate on multiple fronts, probably extending its punitive measures beyond goods to trade in services and to the operations of USA companies on mainland China, Baig said.

USA bond yields rose slightly amid the easier mood but concern about the trade row has helped push the gap between two- and 10-year yields to the narrowest since 2007.

Liu said a depreciated yuan could also give life to industries China has been trying to reduce overcapacity in, often those which are labor-intensive and highly-polluting. The currency has lost more than 4 percent of its value against the dollar since mid-June.

Dollar trading is also expected to be range-bound as investors await the publication on Thursday of minutes from the Federal Reserve's June meeting, and Friday's U.S.jobs data.

"Since the dollar and the Swiss franc softened while the Mexican peso and some other emerging currencies gained, it may appear like a risk-on day", said Kengo Suzuki, chief forex strategist at Mizuho Securities.

Other reports by Click Lancashire

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