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The People’s Bank of China cut the yuan fixing by 42 pips to 6.7954 per USD today, which is the lowest level in the past three months
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One day earlier, the yuan fixing was at 6.7912. The PBoC’s move tells us a lot about the current state of the US-Chinese trade war. Since negotiations started, at Saxo, have considered that the yuan fixing is the right proxy to understand how short-term negotiations are going.
Things haven’t gone very well lately and, as expected, Beijing’s first answer to the US tariff costs 25% increase was to depreciate its currency. In the short-term, coupled with a strong credit flow, it should bring some relief to the Chinese economy since it will limit the erosion of export price competitiveness.
China still has room to let the CNY depreciate further, in case there is no diplomatic improvement with the United States, but it is unlikely that we’ii reach the psychological threshold of 7.00 that is often discussed by investors. In our view, the bottom line is that China cannot allow too much FX weakness as this would hurt local firms that have profits in CNY and a huge amount of debt in USD to refinance in coming months (short-term external debt is about 1.3 trillion USD). Again, this is fine-tuning policy at best.
Christopher Dembik, Head of Macro Analysis at Saxo Bank.
This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire.
This article was originally posted on FX Empire
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