August 5, 2019 / 2:35 AM / 19 days ago

ANALYSTS' VIEW 2 -China's yuan drops to weaker side of 7-per-dollar

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SINGAPORE, Aug 5 (Reuters) - China’s yuan tumbled to the weaker side of the key 7-per-dollar threshold on Monday, hitting its lowest levels since 2008, against the backdrop of a sharp escalation in the protracted U.S.-Sino trade war.

The drop in the yuan to a low of 7.0240 per dollar triggered selling in regional stock markets, the offshore yuan, Indonesian rupiah, the South Korean won as well as other currencies.

On Thursday, U.S. President Donald Trump abruptly decided to slap 10% tariffs on $300 billion in Chinese imports, stunning markets and ending a month-long trade truce. China vowed on Friday to fight back.

Here are analysts’ comments on the move:

MASASHI HASHIMOTO, SENIOR CURRENCY ANALYST, MUFG BANK, TOKYO:

“This could well be the biggest moment for the yuan this year. The impact of U.S.-China trade was is turning out to be very big.

“Looking at mid-point, the People’s Bank of China is trying to stem the yuan’s fall. The PBOC doesn’t look like trying to use a weaker yuan to counter U.S. trade pressure. The yuan’s fall seems to be stemming from panicky selling.”

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE:

“My hunch is this is probably intentional. The timing after Trump announces tariffs makes sense. China doesn’t have much options to retaliate on tariffs.

“Other options like selling Treasuries or restricting metals exports are not powerful tools. The currency is the most powerful tool.”

“Before China was intervening to prevent capital outflows, but now it has a much better grip on capital flows.

“They were intervening because of the impact on trade negotiations, but the fact that they have allowed the yuan to go past 7 shows they have sort of given up.” “We want to see how long the yuan stays past 7 to see if this is just a warning shot. If it stays past 7 it could weaken significantly further.”

RAY ATTRILL, HEAD OF FOREX STRATEGY, NATIONAL AUSTRALIA BANK, SYDNEY:

“The CNH market decided to test the 7 level early on, but the CNY fixing didn’t offer any strong protest. I don’t know how much this is exacerbated by Hong Kong factors. To what extent is the strike in Hong Kong impairing liquidity I don’t know but that will be relevant to volatility.

“I can’t see any signs Chinese authorities are trying to squeeze liquidity in HIBOR market. Our view is that rather than overtly weaponizing the currency they would simply not resist a market driven move.

“Everything is selling off right now. For the time being, the Aussie and kiwi are going to trade with reference to emerging market FX. They will remain the markets’ preferred risk proxies. We have no reason to expect any cessation in selling unless we see any strong action to defend any CNY or CNH weakness.

“Our working assumption is that we are unlikely to see any meaningful resolution to the trade dispute anytime soon. Maybe we need a repeat of 2018 mini crash before Trump blinks. It’s now unrealistic to see the current negotiating tactic is likely to bear fruit.”

EI KAKU, CURRENCY STRATEGIST, NOMURA SECURITIES, TOKYO:

“On Friday, PBOC set yuan midpoint slightly weaker than our theoretical model, so I had an inkling that PBOC’s stance on yuan might have changed.

“Today, the fixing was slightly stronger than we had expected but still it was the first time it was set above 6.90.

“So I would think market players took that as a sign that PBOC is ready to let yuan weaken. It is not surprising if Beijing thinks they should weaken the yuan to negotiate with Trump when the U.S. side is maxing out on tariffs. We expect yuan to weaken to 7.2 this quarter.”

Reporting by Hideyuki Sano & Stanley White in TOKYO, Swati Pandey in SYDNEY Editing by Shri Navaratnam

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