The fast depreciation of Chinese yuan in both onshore and offshore markets have recently raised a lot of concerns to market participants.

The currency, which was fairly stable during the February-May period, has entered into fast depreciation track against the US dollar in June, the timing of which coincided with escalating trade dispute between Washington and Beijing. Yesterday, USD/CNH broke down to a key psychological support level of 6.60, getting closer to the next support of 6.70 – a level that market believes Chinese central bank is willing to defend in the near term.

A weaker currency is a reflection of diverging monetary policy between the world’s two largest economies. Federal Reserve has been firm on tightening whereas PBoC recently opened door to inject liquidity in an attempt to support troubled companies and SMEs. A weaker currency will alleviate pressure on Chinese exporters in a time that trade outlook is loomed by protectionism, at the expenses of highly-leveraged aviation and property sectors. 

Although there was scepticism that Chinese policymaker deliberately allowed the currency to depreciate so that they can take a better position at the negotiation table with Trump’s administration. We have little evidence to prove that. The depreciation of yuan shouldn’t be studied as a stand-alone case, instead, it is part of the Emerging Market Outflow, which has been a major market theme over the past few months. 

For equities, sentiment swung positive overnight despite weaker-than-expected US GDP figure. US Dollar Index retraced from its intraday high to the 95.0 area as risk appetite picked up, but the ascending trend remains intact.

This Saturday’s China Manufacturing PMI is something worth looking at and it is likely to set the tone for next week’s market opening. Against the backdrop of heated trade disputes in June, market is likely to scrutinise this reading for evidence of how business decisions have been affected.

USD/CNH

By Margaret Yang in Singapore

 

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