Forex Comment May 06

China's yuan in sluggish recovery

Trump threat on investment over coronavirus still playing on investors’ minds 

by Uwe Parpart
China's yuan in sluggish recovery

(ATF) Friday's drop in the offshore deliverable yuan – or CNH – from 7.0731 to 7.1349 was dramatic. Today's recovery as Chinese markets reopened from the Labor Day holidays proved a damp squib – and not for lack of trying by the People’s Bank of China (PBoC). 

The central bank optimistically set parity at 7.0690 Wednesday morning, near the average April level of 7.0686. But there wasn't exactly a buying rush in response. By 6pm HK time, the onshore yuan (CNY) traded at 7.0987; the CNH was up only marginally to 7.1197 from Tuesday's close of 7.1226.

The effect of US President Trump's May 1 threat to ban certain US federal government pension fund investments in Chinese securities lingers; the obvious question is whether the threat will be realised in an election year in which both US parties are trying to outdo each other in anti-China rhetoric.

The word on that is not yet in. In an interview with the New York Post, Trump said Tuesday that while China was to blame for allowing the coronavirus to spread globally, it may not have done so on purpose. But elections have their own dynamic and Trump could change his mind and insist on punishment for China, even for an accident.

Meanwhile, the US dollar, which climbed against both the euro and the yuan Tuesday, is continuing to thrive.

The dollar index (DXY) stood at 100.1600 at 6pm and is on the move to challenging late April highs. The culprit there isn't so much the yuan, but the weak euro still trying to regain its footing after being badly hurt by the German Constitutional Court's decision that the bulk of ECB sovereign bond purchases over the past several years were illegal and required immediate review by the German government and parliament.

The EUR traded at 1.0788 at 6pm, down 0.48%.

The EUR is likely to stabilise as the German economy is getting ready to reopen along with schools, restaurants and supermarkets.

The yuan is likely to remain under pressure, subject to Donald Trump's whims. What might rein in the USD and help the CNY is continuation of the past two day's global equity rally. US stock futures are pointing in that direction.