Both the onshore and offshore yuan tumbled past the key benchmark of 7 yuan per US dollar on Monday — the first day of trading in China since the Lunar New Year — as fears about the spreading coronavirus and its economic impact kept investors cautious.
The onshore yuan opened at 6.9900 per US dollar — its weakest level of 2020 — and then slid over 1 percent, breaching the key 7-yuan mark against the greenback in the morning. The offshore yuan had broken the level of 7 yuan per dollar during the Lunar New Year holiday.
I still believe that economic activities should recover swiftly once the number of new cases of infection comes under control, and subsequently market sentiment should also improve
Tai Hui,
chief market strategist for Asia Pacific at JP Morgan Asset Management
China’s stock, currency and bond markets had all been closed since Jan 23 and were due to reopen on Friday, Jan 31, but the resumption of trading was postponed until Monday in an effort to halt the spread of the coronavirus.
Before the market opened, the People’s Bank of China (PBOC) — China’s central bank — set the midpoint rate at 6.9239 per US dollar, 373 points lower than that of the previous trading day.
“We would expect the onshore Chinese yuan to weaken against the US dollar, albeit to a lesser extent than its offshore counterpart we saw last week,” said Tai Hui, chief market strategist for Asia Pacific at JP Morgan Asset Management.
He said he still believed that economic activities should recover swiftly once the number of new cases of infection comes under control, and subsequently market sentiment should also improve.
“This could take time to play out, but this underpins our long-term optimism in the A-share market despite a challenging time ahead,” Hui said.
Sim Moh Siong, currency strategist at Bank of Singapore, expects that the medium-term outlook of the yuan is relatively stable with a 12-month target of 6.90 against the US dollar.
He said the key driver of the yuan remains the Sino-US trade relationship. While the phase-one trade deal marks a peak in tariffs, it is not the end of the strategic rivalry.
As part of the efforts to mitigate volatility in the trading markets, the PBOC injected 1.2 trillion yuan ($171 billion) into financial markets through reverse bond repurchase agreements on Monday.
The central bank said the move is to ensure sufficient liquidity supply and that the liquidity of the overall banking system will be 900 billion yuan more than the same period last year.
The PBOC also cut the interest rate on those short-term funding facilities, but it is believed the move is too marginal. The central bank said on its official website that it was lowering the seven-day reverse repo rate to 2.40 percent from 2.50 percent and cutting the 14-day tenor to 2.55 percent from 2.65 percent.
