The Chinese yuan dropped through the 6.60 level against the US dollar for the first time in six months after the People’s Bank of China (PBOC) lowered the midpoint price by 0.6 per cent on Wednesday morning, a further signal that the central bank wants a weaker yuan in its armoury in the event of an all-out trade war.
Offshore yuan traded at 6.6093 per dollar during early trade on Wednesday and then further lowered to 6.6189 in the evening, down 0.6 per cent from Tuesday.
This is the first time it has fallen through 6.60 – the lower end of many analysts’ predictions for the currency this year – since mid December.
The offshore yuan traded in Hong Kong bounced slightly to 6.60 at around 8pm Hong Kong time while onshore yuan mainly traded in Shanghai closed at 6.6052.
The currency is now down 3.6 per cent since June 13, having dropped for the last 10 days in a row, its longest losing streak in four years. The decline started when the PBOC decided not to follow the US Federal Reserve in raising interest rates on June 14.
The sharp fall on Wednesday came after the bank lowered the midpoint by 389 basis points, to 6.5569 from 6.5180 on Tuesday. The central bank has set the midpoint price lower by a combined 2 per cent over the last six days, and more than 3 per cent since June 14.
As the Chinese currency is not freely traded yet, the PBOC sets the midpoint rate every morning and traders can only trade up to 2 per cent either side of it.
The midpoint level now stands at a six-month low, which has led traders to believe the central bank may favour a weaker yuan, with the US and China on the brink of a trade war.
A weaker yuan against the US currency would support Chinese exports by making them cheaper.
“This is a clear signal from the central bank to US President Donald Trump that China could lead the yuan lower as revenge for the trade war sparked by the US,” said Jasper Lo, chief of investment strategies at Eddid Securities and Futures.
“Besides imposing tariffs on US-imported goods, China wants to tell Trump that the country can use a weaker yuan in a currency war against the US dollar.”
The yuan peaked at 6.2352 in March, up 4 per cent for the year against the US dollar, making it the best performing emerging-market currency.
It has now erased those gains, and the sharp fall in the past 10 days means it is down 1.5 per cent against the greenback so far this year.
Lo sees it sliding further, to between 6.63 and 6.69 in the near term, breaking the record 12-day losing streak set in 2016.
He said a recent reduction in the reserve requirement ratio (RRR) of mainland banks would also have contributed to the yuan’s decline by increasing liquidity in the money market.
The Chinese central bank on Sunday announced it would cut the amount of cash that some banks need to hold in reserve – known as the RRR – by 0.5 percentage points from July 5, unlocking 700 billion yuan (US$108 billion) of liquidity, as it seeks to control leverage and support smaller companies.
Heng Koon How, head of markets strategy at UOB, said the PBOC mid price fixing has led to the weakness of the yuan in both onshore and offshore markets.
The PBOC fixing the yuan weaker by 3 per cent since June 14 and particularly weaker by 0.6 per cent on Wednesday morning has led market “concerns that the Chinese authorities may be managing the onshore yuan in response to the increased trade conflict between US and China.”
“At 6.60, the technical chart for US dollar against the onshore yuan is entering the overbought zone, but an imminent top does not appear to be in place for now. The strong resistance cluster only resides much higher at 6.6820 to 6.7020,” Heng said.
“As for the downside, support is at 6.55 and only a pull back below 6.50 would indicate that US dollar and onshore yuan is ready for a breather,” Heng said.