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Global investors may ignore a bear market in Chinese domestic stocks – largely isolated from the rest of the world. But a fall in the yuan that is blinded by currency forecasters is now triggering warnings of potential contagion.
Greg McKenna, a veteran of the forex market for three decades, said, "I do not talk much about the yuan" in the morning notes to customers. But that was not the case on Wednesday. "People have to look at emerging markets and the Chinese yuan," he writes.
At one point, the yuan was down more than 0.5% against the dollar for a third consecutive day, an unusually sharp move for the currency managed. Such a magnitude has not been seen in a short stretch since the devaluation of China in August 2015, when the currency slid 2.8% over two days. It was at 6.5954 from 16.00. in Shanghai.
"I expect the yuan to rebound to 6.70 or 6.80," said McKenna, a former foreign exchange strategist with Australian banks who is now at AxiTrader in Sydney. "I wonder if this will scare developed markets in a way that the fall of Chinese stocks does not? I think it could."
The yuan has fallen about 3% in the last two weeks. Although this remained only the weakest since December, this decline coincided with an escalation of trade tensions with the United States, which caused China to fear adopting a targeted devaluation as a political tool. The rise in interest rates pushed Tuesday the third of the most traded options in the world. A more typical day would see him from seventh to tenth place; it was leading on Wednesday in Asia.
Here are some views on the evolution of the yuan.
A little panic
"Investors are starting to panic a bit," said Ken Peng, investment strategist at Citi Private Bank in Hong Kong. "Policymakers could allow the market to bring down the yuan, without doing it themselves, while trade tensions with the US worsen", and be wary of foreign exchange reserves, "a little bit". ;effect".
Even so, "in general, the authorities should always hope to stabilize the market to avoid capital outflows," he said. "Declines in the yuan could accelerate as the currency falls above 6.6 per dollar."
"The decline will have spillover effects on other yuan assets, such as stocks."
Stability sign
The stability observed in the gap between the un-delivered yuan of one month and 12 months "suggests that the market does not expect a significant and lasting depreciation of the yuan," wrote Wednesday in a statement Morgan Stanley's strategists Hans Redeker. On the other hand, in the past episodes of depreciation of the yuan, the differential has climbed, they said.
"The long-lasting weakness of the RMB is not our basic case, but if the negotiations between China and the United States before the imposition of import duties on July 6 failed, China could having to rethink their strategy, "writes the strategists. . RMB refers to renminbi, the official name of the Chinese currency.
Default worries
"Concerns about corporate bond defaults are arguably the most dominant factor at this stage," said Tai Hui, JPMorgan Asset Management's chief market strategist for Asia Pacific in Hong Kong. "The prospect of a rise in dollar interest rates and the subsequent strength of the dollar raises fears that companies that have been large issuers of dollar debt may have difficulty repaying their debt, repaying or to refinance. "
Floor soon?
There are reasons for the Chinese authorities to prevent a lasting weakening of the yuan – including the promotion of the currency as rival of the dollar and its use in trade with trading partners, said John Hardy, head of the Saxo Bank A / S foreign exchange strategy.
"In other words, I would be surprised if the recent decay rate continues much longer." Asked why the yuan was weakening, he said "this could be national economic risks and send a warning". simply that the recent appreciation of the yuan (in terms of basket) has gone far enough – or all three. "
Devaluation Duty
"There is a lot of concentration and expectation in the currency trading tool market," said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. "But there is also a strong look at the sovereign divergence here, the Fed is raising and the reduction of the PBOC, and I strongly suggest that rate differentials play a big role."
The Chinese stock market is also divergent from that of the United States, "for me, a weaker yuan makes sense, regardless of a commercial tool or a commercial tool," Jones said. .
Risky option
The depreciation of the yuan is one of the two options most likely to be considered by China to impose a 10 percent increase in Chinese imports of more than $ 200 billion, said Alex Wolf, chief economist emerging markets in Hong Kong. at Aberdeen Standard Investments.
"A depreciation of 10% could offset the additional tariffs at a rate of 10%, although not without significant risks, including exacerbated exits," wrote Wolf in a note to customers on Tuesday. "There are no options at no cost, but I hope we will not reach that point."
– With the help of Cindy Wang, Adam Haigh and Lilian Karunungan
(Updates with comment on trading before, after the sub-line "Stability Sign".)
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