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New Economic Flashpoint: China's Currency Policy
Caught in the Trade War between the United States and China, investors are saying that the the latter's currency policy had turned into a flashpoint. As a result, the Dollar fell versus the Yen.
As it weakened, the Yuan eased against the Dollar in offshore trade on Wednesday. This came after the People's Bank of China's setting of the currency's official midpoint which had not been firmer compared to its prior closing.
In onshore trade, the Yuan opened weaker against the Dollar.
China and the U.S.'s heated trade dispute that was aggravated by President Donald Trump's move to impose more tariffs on Chinese goods.
China's response was to allow the weakening of its currency below the line of 7 per Dollar; Washington was quick to label Beijing a currency manipulator. Last Tuesday, the American President dismissed concerns of a protracted trade war with China. However, Beijing issued strong warnings that being called a "currency manipulator" would negatively impact the global financial order.
Sentiments
Market sentiment went for a rapid dive. A two-edged blade, this ultimately supports the safe-haven Yen and hastens Yuan declines given that no visible resolution is in the cards for the U.S.-Sino conflict.
Risk sentiment is also in shambles post the Reserve Bank of New Zealand's unexpected higher interest rates cut which highlighted the policymakers' fears regarding global economy.
In an interview, Tohru Sasaki, head of Japan markets research at JP Morgan Securities in Tokyo, had been quoted saying, "Escalation of U.S.-China trade frictions has deteriorated market sentiment, which will eventually make Treasury yields go lower and the yen go higher,"
Sasaki added that they still expect the Dollar to rise to 7.35 Yuan by the end of 2019, thus plunging the U.S. administration to unease. "I expect the Dollar to fall to 104-103 Yen by the end of the year." He says further.
Trading and the Dollar Supply
In Asian trading, the Dollar fell by 0.3% to 106.13 Yen. Tuesday saw the rallying of the greenback from a low of 105.51 Yen to as high as 107.07 Yen in a volatile session as motivated by concerns regarding China's currency policy.
These invigorated demand for safe-haven yen further.
The offshore Yuan fell to 7.0701 per dollar.
The onshore Yuan opened with 7.0369 per Dollar against its closing at 7.0250.
This week, China's state banks have been active in the onshore Yuan forwards. They used swaps in an attempt at decreasing Dollar supply.
Reduction of the Dollar Supply, which the market accesses through short-sell Yuan, was aided by the moves made by the state banks in China.
The Dollar index (=USD), which measures the greenback against major currencies, saw little changes on Wednesday at 97.474.
Spot Gold, purchased during times of economic uncertainty in light of its safe-haven status, went up 1% to $1,488.99 an ounce.
Another safe asset, prices on 10-year U.S. Treasuries, also rose in Asia. This pushed yields down to 1.6888%, inching towards the lowest in almost 3 years.
The Euro remained at $1.1202 (EUR=EBS), considered flat so far in Asian trading.
Elsewhere
Further into the currency markets, after the Reserve Bank of New Zealand's interest rate cut of 50 basis points to a low of 1.00%, the New Zealand Dollar obliterated its gains to trade 0.7% lower at $0.6471.
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KYC Policy