China Will Halt Any Disorderly Yuan Slide, Morgan Stanley Says

Irving Hamilton
July 6, 2018

"We think the latest developments go in line with our view that Lopez Obrador will be more pragmatic than some domestic market participants expect", said Tania Escobedo, New York-based Latam FX Strategist at RBC Capital Markets.

China is not using yuan depreciation as a tool in its trade conflict with the US, and will likely step in to avert any disorderly decline, according to Morgan Stanley.

The benchmark Shanghai Composite Index gained 0.41% to 2 786.89 and the Shenzhen Composite Index, which tracks stocks on China's second exchange, rose 0.76% to 1 594.24.

Hong Kong's markets were closed on Monday for a public holiday to mark the 21st anniversary of the former British colony's return to Chinese rule.

The Hong Kong market remained choppy and was last down 1.9 percent, while the Shanghai bourse edged up 0.05 percent. In recent action, one dollar bought 6.6298 yuan, compared with 6.6672 yuan on Tuesday.

China's state-owned banks have reportedly been buying USA dollars in forwards on behalf of the central bank (PBOC) and immediately selling them into the spot market to support the yuan.

Fears over a slowdown in the country's economy and the start of a trade war with the United States have been weighing on Chinese shares and the yuan.

Currently, the currency pair is trading at 6.6330 - up 0.24 percent on the day, but well below the high of 6.6390 seen on Friday.

"Intensifying trade frictions between China and the United States are a test that the Chinese economy inevitably had to experience during its rise", the Economic Daily said.

Bank of England governor Mark Carney upbeat on United Kingdom growth
Image copyright AFP Image caption The US will implement a 25% import tariff on a list of Chinese products on Friday. When the event host said "In Gareth we trust", Mr Carney quipped: "I will get my waistcoat this afternoon".

"This would likely dent China's hopes of further internationalizing the [yuan] - and should in itself be a deterrent to using [the yuan] as a policy option in the trade wars", Kojodjojo said. Europe's tech and energy sectors rose 0.5 and 1 percent respectively.

"The agreement between Chancellor Merkel and German interior minister Horst Seehofer should see German political risk fade into the background as a downside risk for the euro in the near-term", MUFG analysts told clients.

The dollar last stood at 110.97 yen, giving up gains following sharp falls in Chinese shares.

"The (trade dispute) impact is limited as we have localized technologies and suppliers (about 70 percent)", Zhang Yu, senior vice president of BOE, said during a display show held recently in Shanghai.

China is Australia's major export market and its currency, the Australia dollar, is considered a liquid proxy for China-related risk.

Equity futures for the U.S. S&P500 and Nasdaq indicated a firmer session after Wall Street ended higher on Tuesday for the third day in a row.

The market was caught in the well oversold territory after the PBoC, for the time being, stemmed the relentless U.S. dollar rally after avowing to keep the RMB exchange rate stable.

Oil prices climbed after Libya declared force majeure on some of its supplies, with Brent crude rising 0.8 percent to $77.93 per barrel and West Texas Intermediate (WTI) crude was up 1.1 percent to $74.77 a barrel.

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