The Trade War May Be Responsible For The Weakness Of The Yuan

Published on: 08/1/18 11:25 AM

Category: Uncategorised

This is the seventh week in a row the Chinese Yuan has decreased against the United States dollar. This pertains to both the offshore and onshore markets. During the same period, the Yuan also lost against every other G10 currency. The spread between the Yuan’s reference rate and the rate for the offshore Yuan also widened. On Friday, the rate was almost 300 pips. When the future is considered, the Chinese event risks, the PBOC’s guidance, the trade wars between the United States and China and the macro-economic policies of the country will be the drivers for the Yuan.

There has been increasing speculation within the market that the Central Bank of China is attempting to use the war between China and the United States to weaken the Yuan. There was no unexpected weakness seen in the reference rate during the last week. The Yuan fix was moving in both directions during this time. Despite this, it is worth taking the time to closely watch the guidance rate. This may reveal the weakness of the Yuan. This may enable a prediction regarding how much the Yuan will decrease in the near future.

The regulators in China are showing different opinions regarding the macro-economic policies. The targets of the PBOC, securities and banking regulators are curbing any financial risks. The issue of handling the slowdown in the economy has become the responsibility of the Finance Ministry. This triggered an argument regarding the way China is implementing the proactive fiscal policy. The discussions between the regulators indicate numerous internal issues are currently being faced by China. These issues do not appear to have quick or easy solutions.

The official Caixin manufacturing PMI gauges for China are scheduled for release next week. This may help show the current economic conditions. According to Bloomberg, both figures pertaining to July are expected to be slower than the last month. The reason for this low ratio may be the external and internal challenges due to the lack of growth caused by the current trade conflicts. Due to this content, it is unlikely Chinese fundamentals will be offering much support for the Yuan.

The trilateral relationship between the United States, the European Union and China has become a key factor regarding the trade disputes. The EU and the US reached a deal on Wednesday to freeze further tariffs and increase the soybean imports from the United States. Germany and China signed deals two weeks ago valued at almost $30 billion. A lot of products have become victims during the tariff battles of China and the US. The United States and China are both attempting to win a powerful partner to increase their leverage during the trade war.