Chinese Yuan Hits 3 Month Lows – What is Going On?

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While G10 currencies are quietly consolidating, there has been an unusually large move in the Chinese Yuan. Throughout the past year, the Yuan has been gradually rising in value against the U.S. dollar, driving the USD/CNY rate to a record low in January. However over the past week the currency pair shot up to its strongest level since early November. Overnight, the Chinese Yuan dropped to a 3 month low extending its losses as the Shanghai Composite Index dropped 1.75%. Since the Yuan started to move lower last Tuesday, Chinese stocks are down approximately 3%. Many investors may want to attribute the move to the slowdown in China but there has been evidence of slowing growth for the past few months and yet the currency only started to weaken rapidly last week.

The Chinese Yuan would not be moving this aggressively without the endorsement of the central bank. In fact, the rapid turnaround in the currency pair suggests that the People’s Bank of China is shifting away from a policy of Yuan appreciation. Their motivation is simple – to provide support for the export sector and in turn the overall economy as it slows gradually. The PBoC pledged greater Yuan flexibility this year but with the currency moving lower, their actions don’t seem to match their intentions.

The reason why the recent depreciation in the Chinese Yuan is important for forex traders is because of the potential spillover to G10 currencies. We haven’t seen the sell-off in Shanghai stocks hit other stock markets in the region but if they continue to slide, it may be difficult for global investors to ignore the move. If it lasts, the recent rally in USD/CNY is also negative for Asian currencies including the Japanese Yen, Australian Dollar, Korean Won and Malaysian Ringgit.

With no major U.S. economic reports scheduled for release today, it should be a relatively quiet North American trading session. Most of the major currencies will take their cue from U.S. equities, which are poised for a higher open. Based on the early moves in the FX market, there’s definitely an appetite for risk today but there is no clear catalyst.

Kathy Lien
Managing Director

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