The US dollar is mostly firmer today, though has slipped back below the JPY110 level, as lower yields and equities support the Japanese yen. The main story in the foreign exchange market today is the continued slide in the Chinese renminbi. The decline is the sharpest since the 2015 devaluation.
The onshore yuan fell for its eighth session of the past ten, while the offshore yuan has declined in all ten sessions. Over this run, the onshore yuan is off 3.1%, while the offshore yuan is off 3.3%. The PBOC leaned against the yuan’s weakness in three ways: First, the reference rate (fix) for was for a weaker US dollar (than Tuesday’s onshore close). Second, it drained liquidity. Third, reports suggest that parties that often act on behalf of officials, or are perceived as such, were buying yuan today.
The market was not impressed, and the dollar finished the onshore session above CNY6.61. Last week’s low was near CNY6.4280. The Shanghai Composite fell 1.1%. Equities in the region fell, with the MSCI Asia Pacific Index off about 0.6%. The US equity gains offered little consolation. Although US equities stabilized after Monday’s slide, the Dow Industrials closed again below the 200-day moving average and the S&P 500 merely consolidated at the lower end of Monday’s range. European equities are also under pressure. The Dow Jones Stoxx 600 is off 0.6%, with all of the industry sectors lower but energy.
There are two developments that may suggest the market sentiment may not be as bearish the yuan as the continued slide may suggest. First, the fact that the implied one-month vol is above the longer-dated vol (e.g., one year) is consistent with a short-term squeeze rather than a structural shift. Contacts report strong options activity today. Second, the spread between the one-month and 12-month NDF is not suggesting a bearish outlook for the yuan,
Charts circulating of the yuan and with a data point inserted to show when the US announced the tariffs on Chinese goods for intellectual property violations are misleading. There have been other relevant developments, like the easing monetary policy by reducing the quality of collateral needed for MLF borrowing and by easing the reserve requirement. The 0.5% cut in RRR frees up roughly $100 bln. China also reported weaker than expected economic data, including May retail sales, industrial output, and investment.
