The offshore Chinese yuan slumped to two-month low against the greenback following PBOC’s latest easing measures announced on the last day of China’s National holiday.

This was accompanied by a big dive in Mainland China stock markets as they resumed trading after the long holiday, bringing renewed wave of concerns of capital outflow and contagion effect to the rest of the emerging world.

Divergence in monetary policy between US and China, alongside with worsen trade relations, pushed USD/CNH further up to 6.92 area, a step closer to a critical psychological level of 7.0. A weaker currency will help China exporters to counter the headwind of rising trade tariffs amidst a more challenging business environment. On the other hand, however, a depreciating outlook will likely lead to accelerated capital outflow and dampen the interest of foreign investment.

For the stock market, falling currency might not be good news at all. Over the past six months, offshore yuan and Shanghai Composite have exhibited strong negative correlation as trade friction hurts market confidence. We will probably see more rainy days ahead if CNH continues its depreciation trajectory. Asian stock markets, including Hong Kong, Singapore and Korea, need China A-shares to stabilise before they can bottom out from the recent EM rout.

In Singapore, eyes are focussed on MAS bi-annual monetary policy later this week. In April, Singapore’s central bank has tightened its monetary policy for the first time in over two years by shifting its SNEER curve upwards. Since then, the SGD has appreciated against majority of its trading counterparts with the exception of USD and THB. Based on Standard Chartered bank’s estimated SNEER curve, the Singapore dollar has climbed as much as 1.6% above the midpoint of the estimated SNEER band, leaving MAS less urgency to tighten up the policy this month. Besides, an escalating trade war between the US and China, and a moderated economic outlook in the fourth quarter through to early 2019, are adding dovish reasons for the bank to hold fire this time.

USD/SGD

By Margaret Yang in Singapore

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