It may be a different day, but it’s the same story for Chinese assets and that’s not the best news.
The onshore yuan fell for a sixth consecutive session today, the offshore yuan was down for a record eleventh day and the Bloomberg replica of CFETS Index fell for seventh session.
The PBOC’s Thursday fix was weaker by 0.6% to 6.5960 per dollar, but that was stronger than traders and analysts were expecting, which reinforces the notion that the PBoC probably doesn’t want to see the bottom fall out completely, but will be more than happy to sit back and let the currency depreciate if the market wills it.
Letting it weaken too fast risks capital flight, but stopping short of intervening to stop the slide altogether serves to let the currency absorb some of the risk from the trade war.
“The main argument in favour of China using currency depreciation is that the US has pushed them into a corner and with a sound BoP position amid effective capital account restrictions on local residents, they can afford to respond with a weaker currency,” SocGen’s Jason Daw wrote, in a note dated Wednesday, before cautioning that “the growth/export benefit is small from currency depreciation but the risks of unleashing a negative feedback loop – sentiment, volatility, and positioning across assets – similar to what happened in 2015-16, could be a limiting factor.”
Mainland shares fell for a fourth straight day, and the SHCOMP is on pace for a sixth consecutive week of losses – it’s sitting at its lowest levels since March 2016 and is of course languishing in a bear market. On Wednesday, a Chinese think tank warned of a possible “panic” and suggested leveraged stock purchases are back to 2015 levels.
Notably, the SHCOMP took a turn for the worst late in the session, perhaps suggesting authorities are still loath to deploy the national team.
In any event, for now I’ll leave you with some useful bullet points on the yuan from Bloomberg’s Ye Xie:
- The speed of the fall is almost unprecedented. The 10-day decline matches that of the 2015 devaluation
- Even with the recent decline, the yuan is down only 1.7% against the dollar this year, leaving it as the 7th-best performing currency among 31 majors
- CNH is quickly closing the gap vs the DXY Index, suggesting the yuan has corrected the previous trade-weighted outperformance and is now in sync with the broad dollar move
- The CFETS basket is flirting with the 200-day moving average, which happens to be the ceiling of the previous prevailing range between 92.5 and 96. There’s still 2% to go to reach that range’s average of 94
- The PBOC’s fixing has been consistently stronger than the NY close, suggesting that the PBOC isn’t putting more downward pressure on the yuan. It’s been mostly hands-off in terms of market intervention, but may step in to slow things down if needed
- CNH forwards have barely moved, unlike the 2015 episode where both spot and forwards slumped in tandem. That suggests that there’s limited appetite from speculative investors to chase the yuan to the downside after the PBOC closed the loophole in the capital account
- The correlation between the local stock market and the currency has increased. That signals that the recent yuan weakness isn’t yet easing financial conditions. The desirable benefit from a softer exchange rate is diluted by the pain in other financial assets