The PBoC came through with a surprisingly strong fix on Tuesday, much to the relief of risk assets which were in the middle of being bludgeoned again.
It’s at least possible that the yuan will stabilize temporarily, giving traders time to adjust and work out a game plan ahead of the PBoC’s next move.
Still, the Trump administration’s decision to label China a currency manipulator on Monday evening stateside bodes ill and dashes any hope of a quick deescalation.
Asian equities – which suffered mightily on Monday – pared losses following the yuan fix, but no matter how things shake out for the remainder of Tuesday’s trading, it’s worth noting that the Hang Seng erased its gain for the year early on.
The gauge is essentially in free fall, as the yuan story conspires with ongoing civil unrest to cast a pall over the outlook for city shares and for the local economy.
The MSCI Hong Kong fell for a tenth session on Tuesday. The nine-session streak cemented on Monday was the longest string of losses since 1997. If Tuesday ends up being another down day, it will be the worst stretch in some 35 years.
Meanwhile, the Topix suffered a similar fate in early Tuesday trading, erasing its YTD gain, while the Nikkei plunged for a third consecutive session. It’s down nearly 6% in three days.
This is why things need to stabilize in a hurry. Another couple of days like Monday would risk plunging regional equities into something akin to a crisis.
Hong Kong is on the brink politically and as noted on Monday morning, the protests are starting to affect the economy at just the wrong time (the July PMI was the weakest since 2009).
In Japan, the tensions between Tokyo and Seoul have shaken confidence at a time when the yen is experiencing unwanted appreciation pressure thanks to the global risk-off mood. A currency-based disinflationary shock would be a disaster for Japan right now.
On Tuesday, 10-year JGB yields pushed to -0.215%, below the BoJ’s floor. There’s no “right” answer to that situation for the central bank. The last thing Kuroda wants to do is accidentally spark a tantrum by trying to engineer higher yields. If he does nothing (other than say the BoJ will tolerate another, say, 10bps, down to -0.30%), he risks validating the policy “impotence” narrative.
If you’re getting the impression we’re near the breaking point across multiple markets and assets, you’d be correct.
Now we’ll see if today’s yuan fix was a sign from the PBoC that Beijing will seek to calm frayed nerves, even as Donald Trump is guaranteed to ratchet up the bombast once he’s awake and tweeting on Tuesday morning in Washington.