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Trading in CFDs and generally leveraged products involves substantial risk of loss and you may lose all of your invested capital.

Forex News

CNY Stumbles To Five Month Low As US Trade War Intensifies

June 25, 2018

The US and China are embarking upon tit-for-tat trade retaliations. After President Donald Trump announced a new string of tariffs on Chinese imports, Beijing confirmed that it would retaliate, prompting the US administration to promise even more retaliatory levies. These economic events are leaving a significant mark on the yuan, sending the currency to a fresh multi-month low.

 

PBOC or Tariffs: What’s Affecting CNY?

The brewing trade war between the world’s two largest economies does not look to cool down anytime soon. In the last week, the US government targeted USD 200 billion worth of Chinese imports, which encouraged Beijing to react dollar for dollar with its own taxes. President Trump and his administration have confirmed that they will investigate imposing even more tariffs on China.

Over the last three months, the US Dollar Index has been unphased by geopolitical tensions, rallying 6% to 95.00. On the other hand, the Chinese yuan has been erasing most of its year-to-date gains.

The USDCNY slipped 0.7% to a five-month low to 6.4948 on Thursday, while its offshore counterpart, USDCNH, has also fallen to 6.5048. The yuan broke through the 200-day-moving average earlier this week. So far this year, the CNY has shed 3.5% against the greenback.

For a nation like China, a weaker currency is generally a boon because it makes it cheaper for foreign nations to import. That said, investors and officials will typically contend that the People’s Bank of China (PBOC) is intervening into its currency market by suppressing the value of the yuan.

This may not be the case as recent data suggests the PBOC has been sitting on the sidelines. The biggest culprit for the yuan’s depreciation? Trade and the Federal Reserve’s tightening cycle.

Also, Pan Gongsheng, the PBOC deputy governor, has stated that China wants to achieve two things in the coming months: increase the market’s participation in the yuan exchange rate and boost transparency of the yuan fixing. Should Beijing manipulate its currency by putting it on a downward trend, then it would diminish the country’s proposals of good faith.

 

A CNY Buying Opportunity?

During the 2016 US presidential election, then-candidate Donald Trump averred that the yuan has depreciated because of the central bank’s meddling. He reiterated this notion in April, when he accused both Russia and China of playing a “currency devaluation game.”

“Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!” Trump said in a Twitter post.

But has this been the case at all?

First, between 2014 and 2017, the USDCNY appreciated 15%. And, prior to its decline, the yuan touched a 25-month high against the greenback in January.

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Second, the US Treasury published a report in April that avoided naming any major trading partner as a currency manipulator.

Simply put: it has been external factors that have been impacting the CNY more than internal measures.

 

China Unloading US Debt

In recent months, foreign governments have been unloading US debt, says the Treasury Department.

According to the latest Treasury data, foreign governments reduced their holdings by USD 10 billion – if you include all securities, then that number spikes to USD 50 billion.

Russia led the way, decreasing its holdings by about 50%, from USD 96.1 billion to  USD 48.7 billion. This was followed by China and Japan, the biggest holders of US debt, which cut their levels by USD 5.8 billion and USD 12.3 billion, respectively.

As of April 2018, foreigners held USD 6.17 trillion of the USD 14.84 trillion of Treasury debt.

This comes at a bad time for the US government as the Fed unwinds its USD 4.5 trillion balance sheet and Washington runs a near USD 1 trillion budget deficit this fiscal year. To fund its outlays and tax cuts, the Treasury has been increasing debt sales by billions more in 2018.

Treasury Secretary Steven Mnuchin believes there is a growing appetite for US notes:

“It’s a very large, robust market — it’s the most liquid market in the world, and there is a lot of supply,” he said in an interview with Bloomberg last month. “But I think the market can easily handle it.”

 

Conclusion

Unless things drastically change, this environment may present a buying opportunity for traders interested in adding to their holdings of the yuan in the long term.  

Most analysts anticipate the currency of the world’s second-largest economy to decline even further amid trade spats, geopolitical tensions, and troublesome economic data on the domestic front. Even if China adopts a more open approach to the yuan, the PBOC is unlikely to accept a sharp appreciation that could harm its economic recovery.


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