Published: Sat, July 07, 2018
Economy | By Melissa Porter

China pushes back against yuan slide, pledges stability

China pushes back against yuan slide, pledges stability

It is highly unlikely that China is using yuan depreciation as a tool in trade negotiations with the USA, said Tai Hui, chief market strategist of J.P. Morgan Asset Management (Asia Pacific).

Despite the market tumult earlier this week, China appears broadly comfortable with a weakening yuan and would intervene only to prevent any destabilising declines or to restore market confidence, policy insiders told Reuters.

The Asia Pacific MSCI index ex-Japan dropped 0.66 percent on early Tuesday trade, while Japan's Nikkei average was little changed. Beijing has recently started trading oil in yuan which is seen as an initial step to challenging the dominance of the U.S. dollar.

The yuan was the big mover, gaining 0.8 percent as the Chinese currency continued its recovery from an 11-month low after the central bank took steps to stem its rapid slide.

US markets are set to close early for the Fourth of July holiday.

For the day, the index plummeted 409.54 points or 1.41 percent to finish at 28,545.57.

"I detected increasing alarm over trade tensions and a lot of nervousness about a full blown trade war, which comes at a bad time for China where the economy is undergoing a downdraft at the same time the United States is seeing a sharp upturn", Aninda Mitra, Singapore-based senior sovereign analyst at BNY Mellon Investment Management, who visited Shanghai last week, said in an emailed note to media.

The dollar was down 0.2 percent to the yen at 111.35 while the euro traded up 0.1 percent at $1.1665 against the euro.

China remains at the epicentre of FX markets, and while yesterdays price action was fast and decisively USDCNH lower, market conditions ahead of the 4th of July and Friday NFP combined with the start of U.S.

"Both the euro and the dollar benefit because both are seen as safe havens".

The yuan has retreated some 3.7% against the USA dollar over the past three weeks.

Officials in China, the epicenter of the worldwide trade row, have warned the United States that the tit-for-tat tariffs on each others' goods will ultimately prove detrimental for American businesses and jobs.

"The big driver behind USA resilience is that tech has been strong", said Rory McPherson, head of investment strategy at asset manager Psigma. The central bank is considered certain to maintain rates at 1.5 per cent, where they have been since mid-2016.

People's Bank of China officials offered informal intervention on behalf of the flagging yuan in separate comments Tuesday.

Dollar trading is also expected to be range-bound before Thursday's release of minutes from the Federal Reserve's June meeting and Friday's data.

Tech shares have been relatively resilient to trade fears - the New York Stock Exchange's index of 10 tech giants, including China's Alibaba has gained over 30 per cent this year. Oil is one of Canada's major exports.

The Aussie dollar came off a 1-1/2-year low of $0.7311 plumbed overnight, fetching $0.7368.

Oil prices climbed on Tuesday after Libya declared force majeure on some of its supplies, with Brent crude rising 0.83 per cent to US$77.94 per barrel and West Texas Intermediate (WTI) crude was up 0.87 per cent to US$74.58 a barrel.

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