The barrage of easing measures this week was meant to bolster the economy and shore up confidence in domestic markets. However, it has been anything but that. In trading yesterday, the Chinese yuan had weakened to its lowest level since November against the dollar before bids came through. And that is before the sudden wave of strength today:
Needless to say, we all know who’s the one in the market or at least pulling the strings in getting domestic banks to do so.
It seems like they are drawing a line closer to the 7.28 mark, as evident by the previous pushback earlier this month.
Still, I would argue this doesn’t change the long-term directive of markets in their view towards China at the moment. Beijing is expending a decent amount of ammunition in trying to bolster the economy but markets remain unconvinced.
After having plunged last year, valuations were certainly attractive for Chinese stocks. There was a brief respite up until May this year but the selling has returned since then. And the troubling part for Beijing is that investors are failing to find much confidence that the recovery path will be a solid and smooth run.
Going back to the yuan currency itself, it doesn’t look like there’s much scope for a rebound until next year at least. That despite Beijing’s efforts to keep a floor on the currency as seen above. Even with the Fed cutting rates, the trend this year in USD/CNY has been clear. And in the bigger picture, nothing has really changed to the overall outlook since the start of the year.
The narrative continues to be that Beijing will want to smooth out the depreciation in the yuan to be a more gradual one.
This article was written by Justin Low at www.forexlive.com.
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