Forex Comment Apr 02

Yuan depreciates, breaches key support

Chinese currency breaks from three-week trading band 

by Uwe Parpart
Yuan depreciates, breaches key support

(ATF) – The US dollar index (DXY) changed little in the course of the Asian trading day, gaining a meagre 0.09% to 99.7660 by 8pm HK time.

The day's FX action was in the Chinese currency.

After the PBoC set the central parity rate at 7.0995 in the morning, the lowest rate since March 24, the yuan quickly weakened further and broke out of the 7.05 - 7.10 band within which it has traded since March 18.

CNY hit 7.1271 by 9:42am HK time and the swoon lasted until mid-afternoon. It was not until 3:30pm that CNY dropped below the 7.10 level again.

For traders, this was a warning sign. Yuan stability even as dollar shortages pushed up the greenback was supported by two weeks of cautious optimism about containment of the corona virus and return to work by substantial portions of the Chinese workforce. 

Had it been a false dawn? The question remains unanswered. But Chinese rates action provides clear indication that the government believes that monetary policy support for the economy remains a necessity. Lower rates of course portend downward pressure on the yuan. The level of 7.125 breached today has not been seen since last October.