‘What’s next?’ traders ask, after PBOC stays on the sidelines as yuan weakens past key level
Currency experts and traders are rethinking assumptions after the PBOC surprised the forex market by letting the yuan weaken beyond 6.8 per US dollar
The sharp depreciation in the Chinese yuan has broken the market’s expectation that monetary authorities will step in when the currency falls below the psychological level of 6.8 per US dollar.
Most analysts now believe that China’s central bank will tolerate an even weaker yuan as long as it does not trigger market turmoil. Another idea taking hold is that it’s hard to reverse the declining trend before the country’s economic fundamentals improve.
The onshore and offshore yuan both weakened by more than 1000 basis points, or 1.6 per cent, in less that 10 trading days, breaking several psychological lines within a week. The offshore and onshore yuan was quoted at 6.9 and 6.89 per US dollar, respectively, late Friday afternoon.
As of Friday, the People’s Bank of China has lowered its daily reference rate for 12 consecutive trading days, or a cumulative 1,305 basis points or near 2 per cent to reach 6.8796 per US dollar, the lowest level since June 24, 2008.
This is unusual even for a year as volatile as 2016.
Huang Yiping, an advisor to the People’s Bank of China, said on Thursday that the depreciation was caused by a strengthening US dollar, increased demand for assets diversification as well as China’s economic slowdown.
