Renewed pressure on Chinese yuan –  ABN AMRO

Arjen van Dijkhuizen, analyst at ABN AMRO explained that the Chinese yuan (CNY) has extended its depreciation versus the US dollar in recent trading days.  

Key Quotes:

“The CNY has lost around 8% since its late March peak and 5.5% since mid-June and is now back to the levels seen one year ago. This morning, for the first time since 9 August 2017, the yuan fixing was set beyond 6.70.”

“In our view, the escalating trade conflict with the US is a key factor behind the recent CNY weakness.”

“we have seen more signs that the Chinese economy has resumed a (gradual) slowdown and more measures to soften macro-economic policies. It shows the policy dilemma faced by the authorities.”

“Beijing has committed to a more market-oriented exchange rate regime, creating room for market forces to influence the fixing. What is more, Beijing may also use some exchange rate weakening as tool in the current trade war with the US, to correct for the effects of higher import tariffs.”

“On the other hand, we are still of the view that the PBoC will not tolerate too much CNY depreciation versus USD. This was also illustrated by official verbal interventions in early July, after which the CNY showed a temporary recovery.”

“Beijing has learned clear lessons from the 2015-16 wobbles, when one-sided CNY depreciation fears triggered large capital outflows and pressures on FX reserves.”

“All in all, we still find it hard to believe that the Chinese authorities will let the yuan drop in an uncontrolled manner, although in the near-term yuan weakness may still continue.”

“Meanwhile, other EM FX – particularly in Asia but also in other regions – and commodity prices also came under pressure again in the slipstream of this renewed yuan weakening.”