China’s forex reserves post biggest monthly drop on record

China guides its official exchange rate with the dollar, but allows a freer float of the currency in Hong Kong markets. This led to trading suspension at Chinese stock market through the newly implemented circuit breaker mechanism within half an hour of opening bells. “The mid-term outlook for the yuan is still weak given the capital outflows and the slowdown in the economy”, said Claudio Piron, emerging Asia fixed income and currency strategist at Bank of America Merrill Lynch.

The main culprit for the index falls is the banking sector, with the big four off between 0.9 and 1.7 per cent, with ANZ least hard hit and NAB the worst.

There was also a sense of relief in commodities markets as oil prices pulled out of their tailspin, although few experts were willing to declare an end to the slump.

Energy stocks plummeted, including Santos, down by by 7.4 per cent to $3.25; Woodside by 5.1 per cent to $26.94; and Oil Search, by 4.4 per cent to $6.33.

A solid report could soothe fears over the economy’s health by showing recent weakness was largely restricted to manufacturers and exporters. Against the euro, it gained 0.5 percent to $1.0861.

Industrial metals like copper, iron ore and zinc were also steadier after losses of four to six per cent so far this week, while gold was one of several safe-haven assets to retreat.

Analysts’ predictions of milder falls for Asian currencies this year may hinge on the fact that they don’t expect the yuan to weaken much from here on, with the PBOC repeatedly claiming the continued devaluation of the yuan was unjustified.

The pan-European FTSEurofirst 300 index and the euro zone’s blue-chip Euro STOXX 50 index were down 2.4 percent and 1.8 percent respectively, having fallen more than 3 percent earlier in the session.

But the dollar slipped against the Japanese yen, which is considered a go-to currency in times of turmoil and uncertainty. The Chinese central bank’s move to lower the band for its currency has stoked concern the world’s second-largest economy may be weaker than expected, which has driven down stock markets and growth-linked currencies such as the kiwi, which is heading for a 2.8 percent weekly decline against the greenback.

Sources told Reuters that China’s central bank is under increasing pressure from policy advisers to let the yuan fall quickly and sharply, potentially by another 10-15 percent. Between July a year ago and January 7, 2016, the value of the yuan vis-à-vis the USA dollar declined by approximately 5.74 percent from 6.2082 to 6.5646, and the value of the Korean won vis-à-vis the US dollar fell about 4.69 percent during the same period.

“The biggest impact on markets is if the number is very soft, 150k and negative revisions”, said Steven Englander, head of currency strategy at Citi in NY.

The yield has declined nine basis points in the past two days, taking its drop this week to three basis points.

Friday’s fix helped mainland stock markets recover, with Chinese equities climbing more than 2 percent.