Yuan weakens to nine-month low amid bill fallout

Business | Agencies and Stella Zhai 29 May 2020

The onshore yuan yesterday weakened 53 basis points to 7.16 per US dollar, hitting a nine-month low, as Beijing's proposed security bill for Hong Kong fuelled worries of a global fallout just as it tries to kick-start a post-lockdown economic recovery.

Short positions on the currency climbed to their highest since October last year, a Reuters poll of 14 respondents showed, as US-China tensions once again build, with President Donald Trump saying his country was working on a strong response to Beijing's actions.

"Markets are increasingly apprehensive of US sanctions in response to China introducing a National Security Law for Hong Kong," said Wei Liang Chang, a macro strategist with DBS, adding that political considerations would be the prominent driver for the currency in the near term.

The People's Bank of China set its daily reference rate at 7.1277 per dollar earlier yesterday after the offshore yuan tumbled overnight.

The currency was little changed at 7.1755 per dollar as of 5.20 pm yesterday. Escalating tensions between the United States and China had spurred speculation Beijing was willing to let the yuan weaken to shore up exports. Traders said they saw some state-run banks selling dollars in the afternoon, Bloomberg reported.

The exchange rate has become a focus of political sparring between Washington and Beijing, with Trump repeatedly accusing China of manipulating its currency by keeping it low. Chinese officials have said they favor a stable yuan, after a shock devaluation in 2015 that roiled global asset prices and undermined investor confidence in Chinese financial markets.

"The fixing is only slightly stronger than the market expected, so it may suggest that the policymakers are so far OK with orderly depreciation," said Gao Qi, a currency strategist at Scotiabank in Singapore. "Looking ahead, if Trump announces sanctions that are tougher than we already know, the yuan will break 7.20."

Marc Chandler, chief market strategist and managing partner at Bannockburn Global Forex, predicted that the yuan could even weaken to 7.40 per dollar as tensions between Beijing and Washington show little signs of abating anytime soon.

However, Aaron Chan, managing director at Eddid Securities and Futures forecast the currency may not drop below 7.20 per dollar with the Chinese central bank's measures to avoid capital flight, local media reported.

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