China Warming to Idea of Yuan as Trade War Weapon, Analysts Say

(Bloomberg) --

Analysts say the yuan’s sudden slump is a sign China’s central bank will allow more depreciation after the U.S. vowed to hit the country’s products with new tariffs.

The move by the People’s Bank of China to set the yuan fixing weaker than 6.9 a dollar for the first time this year suggests policy makers "may now finally be willing to use the exchange rate as a tool in the U.S.-China trade fight," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd.

The central bank said Monday that the currency’s slump past 7 was due to “protectionism,” adding that it’s able to keep the yuan stable at a reasonable, balanced level.

Analysts still expect the PBOC will eventually act to prevent excessive turbulence in the yuan, which fell as much as 1.5% to 7.0424 per dollar on Monday.

Khoon Goh (ANZ Banking)

• Now the question is how much the authorities will tolerate yuan weakness
• Risk assets will be vulnerable to the breach of the 7 level. There had been decent foreign inflows in the past couple of months into EM Asia on the back of expectations of Fed and other major central bank easing, and the Osaka trade truce
• But with the Fed less dovish last week, Trump with his surprise 10% tariff and now the Chinese authorities letting the yuan go, expect to see near-term outflows leading to pressure on Asian asset markets

Frances Cheung (head of Asia macro strategy at Westpac Banking Corp.)

• There is no hard level to defend, but still the Chinese authorities are likely to smooth market movement if it is too rapid
• Some depreciation in the yuan is not going to help counteract the tariffs much, given high tariff rates
• With additional tariffs on the way, the PBOC is likely to come up with more easing to support growth

Gao Qi (currency strategist at Scotiabank)

• If CNY reaches 7.2, the yuan exchange rate could stabilize again as the regulators will step in to avert market panic
• It is hard to estimate when EM Asian currencies will stop depreciating as this round of weakening is triggered by Trump’s latest tariffs
• We may see another one to three sessions of drops in all EM Asian currencies before stabilizing

Tommy Xie (economist at Oversea-Chinese Banking Corp.)

• There’s no clear resistance for now. I think market is looking at 7.2-7.3 per dollar now
• But it still depends on how China sets the fixing. Should the fixing be set at 6.99 for the next few days, market may gradually calm down
• Should the fixing drift above 7, I think the next target will be 7.2-7.3 range, which reflects the additional tariffs

Ken Cheung (senior currency strategist at Mizuho Bank Ltd.)

• It appears that the tariffs hike suggests the return of tit-for-tat responses and a suspension of trade talks
• The PBOC sees no need to keep the yuan stable in the near term

Zhou Hao (an economist at Commerzbank AG)

• The first question at this point is whether China wants to weaponize its currency to retaliate in a messy trade war
• It remains questionable, but certainly today’s move suggests that China sees there is a need to allow more currency flexibility to counter the headwinds from the trade front

Christy Tan (head of markets strategy at National Australia Bank Ltd.)

• Now that 7 has been broken both onshore and offshore, it may be deemed part of the response to the new tariffs
• The authorities may only step in to manage the market if it gets disorderly, such as a sustained spike in volatility and herd behavior across spot, forward, options trading and so on

Stephen Innes (managing partner, Vanguard Markets Pte.)

• China’s reported move to tell state buyers to halt agricultural imports from the U.S. suggests the return of tit-for-tat trade moves and a suspension of trade talks
• The PBOC likely sees no urgent need to keep yuan stable in the near term and 7 is no longer a line of defense; traders caught surprised are now positioning with expectations of a weaker fixing tomorrow
• Watch the week’s fixing and possible intervention before drawing any definitive conclusion; should neither of these things happen, the first level to watch for the yuan is 7.2 per dollar

Chris Weston (head of research at Pepperstone Group Ltd.)

• The market has taken Monday’s fixing as a message of intent from the PBOC direct to Trump
• Fears of yuan depreciation and a currency war have ramped up again; this will likely compound worries across financial markets

Zhaopeng Xing (markets economist at ANZ Bank China)

• The breach of 7 is the PBOC’s intention; devaluation is a weapon against Trump’s tariff threat
• The authorities will consider measures for cross-border capital flows
• It is hard to say whether it will defend a certain level

Sun Lu (China strategist at Citigroup Inc.)

• Offshore yuan will trade toward 7.5 per dollar if the remaining Chinese goods are also taxed at 25%; USD/CNH forward curve will also trade higher as depreciation expectations grow and corporations look for forward hedging
• Rapid yuan weakening past 7 is likely to be seen by the U.S. as currency manipulation; the U.S. might respond
• Sees more outflow pressure and reduced portfolio inflows into China; PBOC to use more FX reserves to control pace of weakening
• Recommends long three-month USD/CNH position at 7.0986 targeting a move to 7.5 with stop loss at 6.85

Ben Kwong (executive director at KGI Asia Ltd.)

• CNH losing the 7 level is a very bad news for Hong Kong’s listed Chinese companies, as they earn profits in the yuan and earnings denominated Hong Kong dollars would fall. Investment appetite over those stocks will be hurt

Alvin Cheung (associate director at Prudential Brokerage)

• The currency is now the single most important factor affecting Hong Kong stocks, as well as onshore stocks right now, and the currency hangs on trade developments
• If the U.S. carries forth with the tariffs, there could be further downside for stocks affected by the yuan, and I would advise investors to tread extra carefully when buying Hong Kong shares
• Subsiding fluctuations in the offshore and onshore yuan is now a prerequisite for any kind of stability in stocks

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