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#1 07-08-2019 10:08:52

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USD: China devalues the yuan - how will the markets react?

USD: China devalues the yuan in response to Trump's tariffs. How will the markets react?

The Chinese Yuan fell two days ago, breaking below a level long seen as key and fuelling fears of an escalating trade war between the Americans and Chinese. In return, this led to an over-the-counter sale on the global stock markets, which saw American shares suffer their largest intraday decline this year.

The yuan dropped early this week, trading at over 7 yuan to the US dollar for the first time in over 10 years. The pair fell to a record low right above 7.10, a -0.4423% decline. 

The People's Bank of China redefines the Yuan's range

This drop occurred after the PBOC set its daily reference rate at over 6.9 yuan to the dollar for the first time since the end of last year. In local trading, the yuan is allowed to trade within a range within 2% on either side of the reference rate.

While economists and traders wonder whether the weakness of the yuan indicates Beijing's willingness to use its currency as a weapon in the trade war, investors are fleeing stocks and other assets as the prospect of an agreement between the United States and China appear to be dim.

China-sensitive stocks are falling sharply due to yuan appreciation, which increases fears of a trade war

Wall Street was part of a global selloff, with stocks posting large losses in the afternoon. The Dow Jones Industrial Average fell by over 800 points to its lowest level before ending the day down 767.27 points, while the S&P 500 index droped by nearly 3%. The Nasdaq also sank -3.4%.

Paul Cristopher of Wells Fargo said that "some people believe that China and the United States want an agreement and that tha this will soon lead to a sort of agreement or middle ground".

"We believe that the measures taken yesterday by the Chinese show that it is ready to hold off on these negotiations until sometime next year", he adds.

The weakening of the yuan is akin to the devaluation of the currency four years ago, which shook the markets for a good part of the year.

How does this tie in to the current trade war?

With 7 yuans equal to a single dollar, Monday's drop was seen as backlash to Trump's surprise decision last week to start imposing next month a 10% tariff on 290 billion dollars of Chinese products not currently taxed.

The PBOC recently said that the drop of the yuan was "in response to Trump's protectionist measures and tariff expectations against the Chinese".

Trump has expressed anger, saying that the Chinese are engaging in "monetary manipulation".

Trump posted the following on his Twitter account: "China has lowered the price of its currency to an almost historic low. This is "money manipulation". Are you listening FED? This is a major violation that will significantly hurt the Chinese in the long run!"

While the decision at the beginning of the week seemed intended to send a message, analysts remain split on whether the Chinese are ready to use the yuan as a weapon in the trade battle.

What are trade analysts saying?

Allan Meren, an analyst at Danske, says that even though the 7 yuan/$1 level is seen as significant on the markets, other people, such as Gang, head of China People's Bank says "no specific level" is important.

"This is more like a warning than an active devaluation, as the fall of the yuan reflects a deterioration in economic fundamentals," says Mark Hafele at UBS. He also says that "for Chinese decision-makers, arbitrarily defending the 7 yuan level in the midst of these pressures represents a moral risk for all involved."

"Anything worth having is worth going for - all the way." - J.R. Ewing



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