China’s renminbi fell to its lowest level this year on Friday after US president Donald Trump’s surprise move to impose additional tariffs on imports of Chinese goods escalated trade tensions between the two nations.
The onshore renminbi, which trades 2 per cent in either direction of a daily midpoint set by the Chinese central bank, weakened 0.7 per cent to Rmb6.9420 against the dollar, its weakest level since November.
The offshore renminbi, which trades in overseas markets and moves more freely, fell 0.2 per cent to Rmb6.9677, having already dropped 0.7 per cent overnight on the news.
The losses, which echoed the slide in Chinese equities, came after Mr Trump announced plans to put a 10 per cent tariff on an additional $300bn worth of exports from the world’s second-largest economy in the latest twist in a long-running trade dispute between the two countries. The levy, due to take effect on September 1, would come on top of the 25 per cent tariffs that already apply to $250bn of Chinese goods.
Analysts said the lack of progress on trade would weigh on the renminbi, with speculation turning to whether it could break through the psychological seven to the dollar mark in the near future — a widely recognised level that the central bank has staunchly defended during periods of weakness last year and in 2016.
“[The] renminbi is again under pressure to weaken against the backdrop of risk-off sentiment, and [the] dollar-renminbi [exchange rate] is probably testing the 7.00 handle today or in the coming days,” said Hao Zhou, senior economist at Commerzbank.
He said the new tariffs were “like a slap in China’s face as Chinese local media expressed positive tones after the Shanghai talks” on trade earlier this week.
“The deteriorating China growth outlook amid the full-blown trade war [suggests] that the Chinese government would be tempted to allow further renminbi depreciation to support the growth,” said Ken Cheung, Asian foreign exchange strategist at Mizuho.
But rather than allowing the renminbi to move above the seven level immediately, “the People’s Bank of China might use the [daily rate fixing] to guide a more gradual renminbi depreciation towards [the] seven handle”, Mr Cheung added.
“The PBoC has stressed that seven is just a number, so in a scenario of broad USD strength the bank is unlikely to resist the move . . . but in the interest of market stability the PBoC is likely to at least try to make sure the move up is orderly,” said Rodrigo Catril, senior foreign exchange strategist for National Australia Bank. “So a move up [to] seven looks likely over the coming months, but not imminently.”
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