Onshore Yuan Sinks to Weakest Since 2007

The onshore yuan dropped to a 16-year low against the dollar, as pessimism grew toward China’s economy and financial markets.

(Bloomberg) — The onshore yuan dropped to a 16-year low against the dollar, as pessimism grew toward China’s economy and financial markets.

The currency slid by about 0.2% to 7.3294 per dollar and declined by a similar magnitude in the offshore market. The weakness came even after the People’s Bank of China set its daily reference rate at a stronger-than-expected level for a 54th straight day on Thursday, the longest streak since Bloomberg started a survey of estimates for the so-called fixing in 2018.

Weighed by China’s increasingly gloomy economic outlook and policy divergence with the US, the onshore yuan has slumped perilously close to the weak end of its 2% trading band. That’s the case even as Beijing sought to bolster the currency by asking state-owned banks to sell dollars while tightening liquidity offshore to squeeze short bets.

Skepticism remains whether such tools are game changers in the absence of a less hawkish Federal Reserve or a pickup in the world’s second-largest economy. And still to be answered is at what level China’s line in the sand lies for the weakening yuan, where its potential benefit to the economy is outweighed by the risk of a destabilizing spiral of outflows.

“The yuan will likely remain under significant pressure before economic growth finds a floor and the PBOC will continue to defend the yuan,” said Tommy Wu, senior China economist at Commerzbank AG. “However, it may not draw a definitive line in the sand. The PBOC’s objective is likely to slow yuan depreciation, rather than defending an absolute level.”

Amid broad strength in the greenback, the yuan has fallen close to 6% this year, though has fared better against other major currencies. A gauge of the Chinese currency versus a basket of its trading peers is down about 2%.

The PBOC is digging deeper in its toolbox for support measures, but their signaling effects are being outweighed by disappointing economic data and bets that the Fed will keep interest rates higher for longer. Beijing said it would boost the supply of foreign currency in its local market last week and the central bank sold bills in Hong Kong in August to drain offshore liquidity — both methods to aid the yuan. 

“We see a higher probability for a step-up of counter-cyclical measures near term,” said Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong. “But given this round of weakness is primarily driven by stronger dollar and likely further extension of China-US monetary policy divergence, such measures most likely will only lead to a stabilization rather than an appreciation of the yuan.”

Some strategists argue China is unlikely to do anything too drastic to reverse the yuan’s weakening trend. 

“Dollar-yuan holding stubbornly above 7.30 despite the big fix lower tells you the pressure is still higher,” said Jefferies’ Brad Bechtel. “PBOC is definitely going to try not to have some sort of big devaluation event as it ruins the idea of yuan stability, the yuan as a trade currency, potential reserve currency etc.”

(Updates with quotes.)

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