Chinese yuan touches new low as trade tensions continues

According to Gao Qi, a FX strategist at Scotiabank, the yuan is likely to find strong support at 6.70 yuan per dollar.

On Friday, the Chinese yuan touched a new low and was on course to perform its worst ever month with signs of strains on its economy beginning to appear in the world’s second-largest economy.

Washington has showed no signs of backing down from securing its interest in trade ties and is in fact strengthening legislation to further slash Chinese investment in the country.

As a result, Chinese stocks were set to for the longest slide since January 2016, an indicator of how anxious investors are.

In June 2018, the Chinese yuan shed 3.4% of its value against the greenback, its biggest fall since 1994. At 0230 GMT, it was seen trading at 6.6368 per dollar.

The yuan could slide further since Washington is targeting $34 billion of Chinese goods in tariffs, which will come into effect from July 6. It has also threatened tariffs on tens of billions of dollars in tariffs for other Chinese goods.

An extended sell-off in stocks and in the forex market could result in capital outflows from China which would further strain its economy and complicate its decision making. Beijing has put up defenses against U.S. trade action.

“The central bank is expected to step up efforts to calm investors and slow the pace of the yuan depreciation that has sparked risk aversion across regional markets, including a possible reintroduction of the counter-cyclical factor (CCF),” wrote Gao Qi, FX strategist at Scotiabank.

He went on to add, there would be “strong resistance” at 6.70 yuan per dollar.

“It is too early to say whether the counter-cyclical factor has been revived. If market sentiment could recover by itself, there is no need to use the factor. Market still needs some time to digest,” said a trader at a regional bank in Shanghai on the condition of anonymity while adding that there had been some “filtering” of the midpoint fixing, which is set by the central bank each morning, in an apparent bid to keep the yuan from falling too sharply.

Incidentally, in May 2017 China’s central bank added a secret “counter-cyclical factor” to its formula for calculating the midpoint which gave a strong support to the then falling yuan. It has effectively removed the x-factor at the beginning of this year as the yuan has rebounded.

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