Yuan falls, PBOC's Yi does not suggest any red line open to mitigation By Bloomberg

(Bloomberg) – The decline was strongest in a week, as the head of the central bank of China hinted that the currency was not dead and he was ready to relax his policy to protect the economy spillovers from the trade war.

The Chinese currency fell 0.2%, its highest rate since May 31, before slightly reducing its loss to trade at 6.9388 to the dollar. The country has "tremendous" leeway to adjust its fiscal and monetary tools if trade tensions worsen, and no figure is more important than another for the yuan's exchange rate, said the Governor of the People's Bank of China, Yi Gang, in an exclusive interview with Bloomberg.

His comments were expressed as the debate intensified over whether and when the yuan could weaken to $ 7 per dollar, a level that has not been touched since the global financial crisis. The Chinese currency has recently stabilized, after falling in May, while a growing number of officials and representatives of the official press have issued verbal support.

Here's what the analysts said about Yi's comments and the yuan:

National Australia Bank (Christy Tan, Market Strategy Manager)

• China could move from more targeted monetary easing, such as reductions in the reserve requirement ratio, to a reduction in interest rates
• The PBOC can reduce benchmark interest rates if full-year growth may fall below 6.2% and the United States imposes tariffs on recent Chinese exports.
• The risk of depreciation of the yuan 7 has increased in parallel with the escalation of the trade war and the prospect of prolonged tension
• The 7-point break will occur if there is no progress at the Group of 20 summit and the US imposes more tariffs

Nissay Asset Management (Toshinobu Chiba, Senior Portfolio Manager, Fixed Income Investment Department)

• Yi's comments imply that China will focus on easing its monetary policy and allow the yuan to depreciate.
• The PBOC can fix its weaker fixation
• The central bank will not allow the yuan to slide "drastically" when the currency falls below 7; he will cap the yuan slide at about 7.5 this year
• The fund currently bets that long-term Chinese government bonds will rise, and "slightly overweight" on the yuan; can become currency neutral after seeing next week's benchmark

Scotiabank (Gao Qi, Strategist)

• Yi's comments suggest that China could allow the yuan to break 7
• The governor seeks to prepare and guide the market for a possible break
• The level can be exceeded if trade negotiations fail

Westpac Banking (Frances Cheung, Head of Macroeconomic Strategy for Asia)

• "China has a lot in its toolbox to support liquidity and growth. We think the PBOC has a bias to relax "
• The Westpac Bank still has a cumulative reduction of 300 basis points in the reserve ratio, expected for the rest of the year, which will be "a combination of targeted and general cuts"
• "Yi's latest comment should reassure the bond and bond market, which had been cautious despite easing expectations"
• China still intends to avoid a rapid depreciation of the yuan, but would not want to be constrained by certain levels
• Ideally, the passing of the yuan to certain key levels will not prompt uncontrolled capital outflows