China Guides Yuan Sharply Lower; Jolts Markets, Offshore Currency Plunge

Also weighing on the dollar were relatively dovish minutes of the U.S. Federal Reserve’s December policy meeting, released Wednesday, as it suggested that the Fed may not raise interest rates as frequently as previously thought due to concern over low inflation, dealers said. Their efforts have sparked a stock market crash in equities around the world.

Though China has moved to make the yuan’s value more broadly market-based, linking it to a basket of currencies rather than the dollar, “there remains considerable confusion in the market about what policy-makers’ true intentions are”, said Charles Collyns, chief economist at the Institute of International Finance.

The yuan devaluation is just one more sign that the Chinese economy is suffering.

The Australian dollar, often used as a proxy for China-related trades, fell to a two-month low of $0.7025 AUD=D4 . Offshore yuan is at the weakest since offshore trading started in 2010, and is trading at much softer levels than onshore.

Beijing – in general – is loathe to give up control, despite the success of market reforms since the 1970s. The PBOC is rumored to be preparing to add some 130 billion yuan ($20.0 billion) of liquidity into the financial system through short-term loans to prevent the vulnerable yuan from suffering further. What is new is the market’s fixation about developments in the Chinese stock market. On January 4, another Black Monday, as investors burned 264 billion euros in Europe and Wall Street suffered its worst opening since 1932.

In the past couple of years, China had begun allowing, even encouraging, companies and people to invest more of their wealth overseas.

“The fear of the unknown has become the largest risk for RMB in the near term, despite China’s sizable current account surplus”.

The euro recovered a bit to trade at 1.0817 gaining 38 points on Thursday morning as Asian traders sold dollar’s. Although China theoretically should gain about 17 million jobs, the internationalization of the yuan means that China’s foreign exchange reserves are evaporating and state-owned enterprise borrower insolvencies could result in bankruptcies of state-owned banks.

The Australian dollar was 0.85 per cent weaker yesterday in trade against the U.S. dollar at 0.7012, while the Taiwan dollar lost 0.3 per cent, the Korean won fell 0.27 per cent, the Indian rupee dropped 0.15 per cent, the Indonesian rupiah softened 0.11 per cent, the Thai baht dropped 0.1 per cent and the New Zealand dollar was down 0.03 per cent. But the moved unleashed turmoil in both local and worldwide stock markets by raising concerns that China’s economy was weakening too quickly. “This kind of trading is unrelated to the demand of the real economy and does not reflect the real market demand and supply, which only leads to abnormal fluctuations in the yuan’s exchange rates and sends the wrong signals to the market”, it said.

A plunge in oil revenues is seen hurting many oil producing countries such as Saudi Arabia.

HSBC said the PBOC will continue to create a “floating regime” for the exchange rate and reduce intervention in the foreign exchange market.