- The Chinese yuan has weakened against the greenback and other major currencies over the past month.
- It’s fallen 1.6% against a trade-weighted basket of currencies, a move rarely been seen over the past few years.
- Some believe China may use its currency as a bargaining chip in trade negations with the US, but local financial strategists aren’t convinced.
If you haven’t been watching movements in the Chinese yuan (CNY) recently, perhaps you should now.
Amidst mounting trade tensions between China and the United States, the yuan has weakened not only against the greenback but also other major currencies.
And, by usual standards, the move hasn’t been little but a lot.
The chart from RBA Capital Markets tells the story of the tape, showing the depreciation in the yuan over the past month against the People’s Bank of China’s (PBoC) CFETS basket, a trade-weighted measure of movements against the currencies of its major trading partners.
“It’s always the pace of depreciation/appreciation of a currency that central banks care about and as such, it is worth highlighting the pace of CNY depreciation versus the basket has hit 1.6% [over the past month] — a two standard deviation event where China has historically stepped in to stop the rot,” says Sue Trinh, Head of Asia FX Strategy at RBC Capital Markets.
By rot, Trinh is referring to the slide in the renminbi.
The move against the CFETS basket over the past month has only been seen on four other occasions, and most of those were during periods when concerns about the Chinese economy, and its financial system, were elevated.
While the PBoC set the midpoint of USD/CNY daily trading range against the US dollar at 6.5180, the highest level since January 10 (implying a weaker yuan), Trinh says this was actually lower than market movements implied, hinting the PBoC may be reluctant to let the yuan slide much further.
“It’s early days, but this could indicate that China thinks we’ve seen enough CNY depreciation for the time being, so watch out for more aggressive fixings especially if we get a few more days of sustained depreciation through 2 standard deviations,” she says.
Richard Grace, Chief Currency Strategist at the Commonwealth Bank, shares a similar view to Trinh.
“We expect the PBoC to continue keeping the fix stable around 6.5000–6.5500 and monetary conditions slightly tighter, to anchor market expectations of a CNY depreciation,” he said in note.
While some have speculated that China may use its currency as a bargaining chip in trade negations with the United States, Grace believes the PBOC will be reluctant to go down this path given it would risk reigniting capital outflows from the nation.
“During the 2015-2017 CNY depreciation episode, the combination of capital outflows and direct currency intervention to sell the USD led to China losing $US1 trillion in FX reserves,” he says.
“The PBoC is unlikely to desire a return to such a predicament by deliberately depreciating the CNY.”