Yuan's record weekly losing streak puts specter of 7 in play

BEIJING — A record string of weekly losses saw China’s yuan closing in on the key milestone of 7 per US dollar on Friday (Aug 3), a level it hasn’t weakened past in more than 10 years.

The currency tumbled as low as 6.8965 to the greenback before suddenly paring before the official close, when traders said they saw at least one large bank aggressively selling US dollars.

The yuan is set for an eighth week of declines, the longest such streak since China’s modern exchange-rate regime began in 1994.

The weakness comes as trade friction intensifies, with Chinese authorities pledging on Thursday to retaliate to any escalation in American tariffs.

The 7 level for the yuan against the greenback is seen as significant as it could be the point where China steps in to arrest the decline for fear further sharp losses could prompt selling and capital outflows, according to analysts. 

The yuan has been one of the weakest currencies in the world over the past three months.

“Investors are focusing on two trades - shorting the yuan and China’s rates - and they will keep pushing the yuan weaker until the People’s Bank of China steps in to intervene heavily,” said Mr Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore. 

“If the yuan breaches 7 per dollar, the currency will likely tumble much faster and send shockwaves across markets, hurting stocks as well.”

The yuan was down 0.53 per cent at 6.8745 per US dollar as of 5:27 pm on Friday, its weakest since May 2017.

Three traders, who asked not to be identified because they aren’t allowed to speak publicly on the matter, said a big bank sold dollars at 6.896 to 6.860 yuan.

The offshore-traded yuan weakened 0.22 per cent at 6.8962. The Chinese currency is also near the lowest on record against a trade-weighted basket.

China’s markets have been rocked by the threat of a trade war with the US, which escalated Thursday as the Trump administration warned of more pain unless Beijing changes its economic system.

China's equity market, one of the worst performing globally this year, has now lost its place as the world’s second-biggest to Japan, data compiled by Bloomberg show.

“By pushing the yuan weaker quickly, the market is trying to test the PBOC’s bottom line,” Dr Le Xia, Banco Bilbao Vizcaya Argentaria SA’s chief Asia economist, said before the yuan pared its drop.

He added: “The central bank hasn’t heavily intervened so far, suggesting it believes China is not experiencing disorderly capital outflows, and it’s willing to seek a weaker exchange rate amid a slowing economy and the trade war.” BLOOMBERG