China fixes yuan midpoint weaker than 7 for the third consecutive session
An employee counts 100-yuan banknotes at a bank in Lianyungang, China.
STR | AFP | Getty Images
This is the third consecutive session where the central bank set the midpoint at a level weaker than the psychologically important 7-yuan-per-dollar level.
Analysts were expecting the PBOC to set the midpoint at 7.0331 per dollar, according to Reuters estimates.
Investors have been monitoring the dollar/yuan exchange rate closely following an escalation in trade tensions between Beijing and Washington.
The yuan depreciated past 7 per dollar on Monday last week for the first time since the global financial crisis in 2008, which prompted the U.S. Treasury Department to designate China as a currency manipulator. A weaker currency makes a country’s exports cheaper and the Trump administration has consistently complained that a cheaper yuan will give China a trade advantage.
The PBOC allows the local currency to fluctuate against the greenback within a narrow band of 2% from each day’s midpoint. This is known as the onshore yuan, whereas the less restrictive exchange rate used outside mainland China is known as the offshore yuan.
Competitive devaluation fears
China’s moves to set the midpoint at levels weaker than 7 last week “stoked fears of a competitive devaluation policy, putting pressure on other Asian currencies,” analysts at risk consultancy Eurasia Group wrote in a note. Still, they said, Beijing will prevent any rapid depreciation of the yuan since “substantial devaluation would drive capital outflows and create one-way bets in the market on further depreciation, as seen in 2015 and 2016.”
Instead, China’s central bank will use messaging and intervention to keep the pace of depreciation against the dollar gradual, the analysts added. “The bank will also be careful not to allow the (yuan) to depreciate on a sustained basis against a broader basket of currencies.”
China’s trade-weighted CFETS yuan index, which measures the local currency’s exchange rate against a basket of its peers, broke a new low on Friday.
For its part, the PBOC has denied it is devaluing the yuan to counter American tariffs. But, White House trade advisor Peter Navarro said on Friday the U.S. will respond forcefully if China weakens its currency to neutralize the effect of tariffs.
Ratings agency Moody’s said in a Friday note that the U.S. labeling of China as a currency manipulator is likely to escalate trade tensions between the world’s two largest economies, and credit quality of some sovereign debt could come under pressure as a result.
“While the currency manipulator designation is unlikely to have a material impact on China’s foreign exchange policy, we expect that the positions of both countries on the trade dispute will harden,” they wrote.
“More broadly, worsening trade and currency tensions between the US and China will curb global growth,” they added. “Market expectations of further declines in the renminbi may also lead to devaluation in other currencies, particularly those with strong trading ties with China.”
WATCH: Weakness in the yuan is a ‘measured move’
— Reuters contributed to this report.