August Is Officially The Chinese Yuan’s Worst Month In History
The prolonged trade dispute between China and the U.S. has negatively affected many global currencies, but the Chinese Yuan is arguably the most affected currency as a result of diminishing investor confidence.
August has been the worst month for the Chinese Yuan, whose bearish performance prevailed as U.S. President Donald Trump armed himself with more tariff threats. The Chinese currency has so far experienced a 3.9% decline in its value since the start of August. The last time that the currency experienced such a major loss was in January 1994.
August also marked the first time that the Chinese currency passed the critical level of 7 Yuan per US dollar since the 2008 financial crisis. The Yuan’s performance reflects the pressure that it has been facing courtesy of the trade war and also China’s slowing economy. This has fueled speculation about extra monetary easing measures in the future, thus causing traders to shy off from the Yuan.
The outlook has also become worse on account of the failed trade negotiations, a situation which has affected the U.S. and Chinese economy. Meanwhile, the People’s Bank of China (PBOC) is becoming increasingly concerned about the Yuan's continued weakness, a situation, which will lead to more capital outflows and subsequently further weakness of Yuan.
The chart above demonstrates the Yuan's performance so far this week, including a surge that took place on Monday, thus sending the value of the Chinese currency further from the key support level. The USD/CNY currency pair kicked off Tuesday’s trading session with a bullish surge from the day’s low at 7.1440 before peaking at 7.1692. The currency pair traded 7.1622 at the time of this press.
Why China is concerned about Yuan's current performance
President Trump accused China of currency manipulation when the Yuan first dropped past the 7 levels. This is because the weakening Yuan reduced the impact of the additional tariffs that POTUS imposed on Chinese products imported into the U.S. This suggests that a weaker Chinese currency might be an advantage for China but not quite.
The PBOC expressed concerns over the impact of the trade war on the Yuan and also on the Chinese economy. More pressure from the trade war will lead to less investor confidence and thus, more capital outflows, which will then cause the currency to continue plummeting. This is not good for the country because it will destabilize China’s economy.
The world is now observing to see how China plans to retaliate after Trump’s recent threats. China’s central bank will be playing roulette with the Yuan’s exchange rate by retaliating, a situation that might not yield expected results.
The country has, however, expressed interest in talks with the U.S. that will end their trade dispute. The trade standoff between the two countries have been going on for multiple months now and its impact has been felt across the globe, particularly with the slowed global economy. President Trump is, however, determined to push China into yielding to his pursuit for what he terms as a fair trade agreement.