After what was a tumultuous, and in the case for stocks the shortest trading session on record, Chinese markets are about to reopen again for Friday trade.
Markets will yet again be focusing on two particular events – the USD/CNY fix from the PBOC at 12.15pm AEDT along with the reopening of China’s stock market 15 minutes later.
While the stock market’s 7%, 14-minute rout garnered all of the headlines yesterday, the yuan fix, as has been the case most days this week, will likely determine how sentiment across the broader Asian region fares.
Yesterday the PBOC fixed the USD/CNY rate at 6.5646, higher than the 6.5555 level it closed at yesterday and Wednesdayâ€™s fixing level of 6.5314. It was the highest fix for the currency pair since April 2011.
According to BNZ currency strategist Jason Wong, this amounted to a 0.51% devaluation for the day, greater than the cumulative decline over the previous two days and the largest daily move since the August 2015 shock devaluation.
The initial weakening sent risk assets into a spin, heightening fears that capital outflows are accelerating on the back of deteriorating economic conditions. These fears were further flamed later in the session on the news that Chinese FX reserves fell by a record $108 billion to $3.33 trillion in December.
Clearly the government is spending plenty of cash trying to defend its currency against accelerating capital outflows.
After initially spiking to a fresh five-year high of 6.7511 on the news, USD/CNH – offshore traded yuan – suddenly reversed course just as Chinese stocks were tanking, indicating that government, through its state-run banks, were intervening to support the yuan.
It worked, and as the chart below reveals, offshore trade yuan has held onto its gains during the overnight session.
It currently buys 6.6858, still above the 6.5926 level onshore traded yuan, or USD/CNY, closed at overnight.
Despite the recovery in offshore traded yuan, it still suggests that another weaker fix from the PBOC will arrive later on today.
However, this is all but expected, so there is a risk that a limited weakening, or no weakening at all, could create a knee jerk move higher in risk assets.
We’ll find out at 12.15pm AEDT this afternoon.
As for stocks, the level of the yuan fix will likely dictate its performance in the early parts of trade.
Unlike yesterday, the session will run its entire course thanks to the decision by China’s stock market regulator, the CSRC, to remove market circuit breakers that have halted trade in two of the past four sessions.
At the margin that decision, along with news that the CSRC will limit share sales by significant shareholders from now on, may be supportive for the market.
There’s a lot of ifs and buts heading into today’s session. Whatever the markets end up doing, it’s almost certain to be volatile.