Trump win affects Yuan drop to 8-year low: Will PBOC step in?

Donald Trump win affects Yuan as it declines to its eight-year lows. Will China’s currency depreciate further? Will PBOC step in?  

15 November, AtoZForexThe Chinese Yuan dropped to eight-year lows against the US dollar on Tuesday. The dollar was reaching 6.8640 yuan during Asia trade. The People’s Bank of China (PBOC) set its daily fix at 6.8495 yuan against the greenback which was higher than the Monday’s daily fix at 6.8291 yuan.

Trump win affects Yuan drop to 8-year low

According to analysts, the move in the yuan is due to the US dollar’s surge following the victory of Donald Trump. On Monday, the dollar index evaluating the US dollar against a basket of currencies traded at 100.22 in U.S. trade. Before the US elections, the dollar index traded below 97. Last year when the Federal Reserve (Fed) prepared to increase the interest rates the dollar index went up to 100.51. Donald Trump’s tax policies have caused analysts to project an increase in inflation and stimulated a rise in bond yields. This could support demand for the US dollar. Jason Daw, a strategist at Societe Generale, mentioned that:

“While the PBOC might prefer to slow the pace of depreciation, the dollar trend is a key factor in their decision process. Additionally, yuan trading volume remains elevated, which typically coincides with more capital outflows and yuan depreciation pressure.”

Based on the expectations of Jason Daw, the yuan can drop to 7.10 against the dollar during the next year.

Although the shifts in yuan may seem to be large, the fixing at 6.8495 may indicate some support from policy makers. Patrick Bennett, a foreign-exchange strategist at CIBC, commented that the PBOC probably attempted to maintain the fix stable. Since the policy makers would not want the level to move higher one day and then decline sharply the next.

IS China a currency manipulator?

The Chinese currency has been a source of political tension due to the promises of Donald Trump to mark the country as a currency manipulator and impose a 45 percent tariff on China’s exports to the US. The label is imposed and, thus, the penalties if the country is in a substantial bilateral trade surplus with the US; a material current account surplus bigger than the 3 percent of gross domestic product; and constantly intervenes to keep its currency weak. China falls only under the first category.

In case the label and tariffs are imposed, the yuan could further depreciate since China’s policymakers would lose incentives to support the currency.

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