The Chinese currency, the yuan, has been quietly losing value against the US dollar for the past 5 weeks.
That’s important because the yuan is now back at levels we saw during August’s stock market crash which was, in part precipitated by the surprise devaluation of the USDCNY rate or around 2% by the People’s Bank of China (PBOC).
After weakening to to 6.4486 against the US dollar in the immediate aftermath of the devaluation, the yuan strengthened to a post-devaluation high of 6.3157 against the US dollar on October 30.
Since then however, the PBOC has let the USDCNY rate gradually rise (yuan weaker) to 6.4081 this morning. That’s a move of just 1.46% but it’s also the weakest the Chinese currency has been the end of August.
That weakening trend is important when viewed in context with the fall in Chinese foreign exchange reserves to a two-year low.
The Wall Street Journal reports that the PBOC said its “foreign-exchange reserves declined by $87.22 billion from a month earlier to $3.438 trillion at the end of November”. That’s the lowest level since February 2013.
Why the combination of a weaker currency and lower foreign reserves matters is because it suggests capital is continuing to flow out of China as the Fed readies to raise rates for the first time in 9 years.
So far the market doesn’t appear too concerned with the yuan’s weakness. That’s likely because having just been included in the International Monetary Fund’s official currency basket, the SDR, Chinese officials have promised a period of stability for the currency.
That means “China’s central bank doesn’t want the yuan to fall drastically,” Ding Shuang, an economist with Standard Chartered PLC told the WSJ. But he added the PBOC “hopes the market forces could guide down the Chinese currency in a gradual manner”.
For the moment, that’s what foreign exchange traders are seeing. But a sharp fall in the yuan or a move above the 6.4486 post-devaluation high is something to watch for.
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