For China's Yuan, the Path Toward 7 Per Dollar Is Now Wide Open

(Bloomberg) --

China’s yuan may be entering the final leg of its journey toward 7 per dollar.

The offshore currency weakened to the lowest level since November on Friday, moving closer to a record low it last hit in early 2017. The onshore yuan breached the 6.93 level on Monday for the first time this year as markets reopened after a long weekend. The mainland rate hasn’t touched 7 since the financial crisis.

Bearish technical signals and dovish comments from the People’s Bank of China are adding pressure to the currency, only weeks after yuan watchers speculated the central bank was helping limit depreciation. Analysts are now increasingly convinced that officials won’t stand against the currency breaking 7, a thesis made stronger by PBOC Governor Yi Gang’s comment that no specific level for the yuan is important.

China’s currency became a barometer of stress for traders around the world in May, when tensions between the U.S. and China unexpectedly escalated. This month’s possible meeting between Presidents Donald Trump and Xi Jinping at the Group of 20 summit in Osaka could be the catalyst for the currency to break -- or escape -- 7 per dollar.

"The chances of the yuan breaking 7 are increasing," said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. "Policy makers are more comfortable with letting the level go now, as there’s no intense bearish speculation in the offshore market and trade tensions are intensifying."

Yi also said there’s “tremendous” room to adjust monetary policy if the trade war deepens. Data Monday showing China’s imports tumbled 8.5% in May -- more than double the predicted pace -- revealed weakness in the economy. While China unveiled a plan last week to spur demand for automobiles and electronics, some analysts were disappointed by the policies, which don’t include any new spending from the central government.

Goldman Sachs Group Inc. expects the yuan to breach 7 within the next three months, as its decline could be a natural offset to higher U.S. tariffs, strategists including New York-based Zach Pandl wrote in a note.

DBS’s Ong said the yuan could fall past that level "as soon as the end of June, if the U.S. doesn’t appear to be willing to carry on trade talks with China at G-20."

The offshore yuan rose 0.2% to 6.9299 as of 9:22 a.m. in Hong Kong after the PBOC said it planned to sell bills in the city in late June. The daily fixing was set at 6.8930, which was stronger than the average forecast in a Bloomberg survey. The onshore yuan starts trading at 9:30 a.m.

--With assistance from Ran Li.

To contact the reporter on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann

©2019 Bloomberg L.P.