Views Article – Sharenet Wealth

Asia, Forex

Yuan eases to 1-week low, Trump’s trade threat dents mood

SHANGHAI, July 17 (Reuters) – China’s yuan eased to a one-week low against a broadly firmer dollar on Wednesday, while sentiment was also dampened after U.S. President Donald Trump maintained his threat to impose additional tariffs on Chinese imports. The dollar rose against a basket of currencies after strong U.S. retail sales data reinforced market expectations the Federal Reserve will refrain from making a large 50 basis-point rate cut at the end of this month. Interest rate futures are fully priced for a 25-basis-point cut, though that hasn’t stopped traders from trying to second guess what the Fed would do. Dealers in Beijing said a firm dollar and slight risk-off tone pressured the yuan in early trade after Trump said the United States still has a long way to go to conclude a trade deal with China but could impose tariffs on an additional $325 billion worth of Chinese goods if it needed to do so. Prior to market opening on Wednesday, the People’s Bank of China set the midpoint rate at 6.8827 per dollar, 117 pips weaker than the previous fix of 6.871. In the spot market, the onshore yuan opened at 6.8801 per dollar and eased to a low of 6.8833 at one point, the softest level since July 10. At midday, the spot rate was changing hands at 6.8827, 67 pips weaker than the previous late session close. The onshore yuan swung in a range of about 30 pips in the morning session, while the half-day trading volume was also low. A trader at a Chinese bank said market volatility was “too low” as investors were unwilling to test the yuan’s downside given the spot rate was approaching the key 6.9 per dollar, a level at which market participants believe the central bank would intervene to prop up the yuan. The options market reflected similar views. Implied volatility in yuan options, which gauges investors’ expectations for swings in the dollar against the yuan, continued to fall across key tenors. The one-month contract eased further on Wednesday to its lowest level since August 2017. Several yuan traders also said uncertainty around the Sino-U.S. trade standoff and weakening economic fundamentals were also discouraging yuan bulls. Simon Bishop, director of corporate hedging for Asia Pacific at Western Union Business Solutions, said it is a “valid concern” that the tariff row with the United States could harm the Chinese economy. “China for the last five years or even longer than that has been trying to make sure that their internal economy is robust enough to withstand anything that comes externally; and while we’re not sitting there and running at 8% growth as we had…6% growth or still above 6% growth still a pretty good number,” he said. “We’re actually forecasting the yuan to strengthen a little bit to 6.7 down to 6.6, and then ultimately sort of middle of next year around 6.5.” The dollar index, a measure of the U.S. currency against a basket of its major peers, traded at 97.338 at midday from the previous close of 97.395. The offshore yuan was trading at 6.8835 per dollar as of midday. The yuan market at 4:05AM GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8827 6.871 -0.17% Spot yuan 6.8827 6.876 -0.10% Divergence from 0.00% midpoint* Spot change YTD -0.14% Spot change since 2005 20.25% revaluation Key indexes: Item Current Previous Change Thomson 93.67 93.6 0.1 Reuters/HKEX CNH index Dollar index 97.338 97.395 -0.1 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People’s Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.8835 -0.01% * Offshore 6.9153 -0.47% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by Winni Zhou and John Ruwitch Editing by Shri Navaratnam)

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