Published Jul 23, 2018 07:43AM ET
Emerging Markets at Mercy of Yuan Swings as Currency War Looms
(Bloomberg) -- China’s yuan is back at the top of emerging-market investor worries as the deepening standoff between the U.S. and China over trade threatens to evolve into a currency battle.
As the dollar strengthens amid the trade tensions, the slide in the yuan is spurring concern that China might be embracing purposeful devaluation as a policy tool. That stoked the ire of U.S. President Donald Trump, who accused the country and the European Union of manipulating their currencies. China’s foreign ministry spokesman said Monday the country has no desire to boost its exports through competitive devaluation while the nation’s sound economic fundamentals are providing support to the currency.
“The yuan’s definitely weighing on risk, although much more so on Asia,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard Investments. “But we are confident that the Chinese will not let things get disorderly. Having recently won the battle against capital outflows, they’re not about to stoke those again by letting the currency depreciate significantly.”
The People’s Bank of China last week fixed the currency past 6.7 per dollar for the first time in almost a year and on Friday weakened the reference rate the most in two years. On Monday, the PBOC strengthened the yuan’s fixing by 0.12 percent to 6.7593, though it was still slightly weaker than traders and analysts had expected. The offshore yuan erased its gain to trade lower at 10:30 a.m. in London.
A further drop in the Chinese currency to 7 against the dollar may trigger another round of panic selling in emerging markets, Gutierrez said. The currency regained some ground on Friday after a big Chinese bank sold dollars, traders said.
Chasing a Weaker Yuan is Probably the Wrong Trade, Goldman Says
Asian currencies, including the South Korean won and Indonesian rupiah, have borne the brunt of the sell-off in emerging markets this month, with the yuan the worst performer after Turkey’s lira.
The Argentine and Mexican peso as well as Brazil’s real have been the top-performing developing-nation currencies this month. Aberdeen Standard has been overweight Latin American currencies “for quite a while,” Gutierrez said.
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(Updates yuan prices in fourth paragraph, Taiwan data in bullet.)
Written By: Bloomberg
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