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Chinese Yuan tumbles amid expectation of monetary easing by PBOC

Chinese yuan tumbled on Thursday as investors increasingly expect that the central bank will ease monetary policy in support of the economy which has been struggling amid the country’s deleveraging efforts.

Offshore yuan was plunging more than 550 pips or 0.8 per cent to hit 6.8008 against the USD as of 6pm Hong Kong time, breaking through 6.8/USD mark for the first time since 12th July last year. The exchange rate broke through seven psychologically important resistance lines within one day to hit a fresh new low in more than one year.

Onshore yuan slide by more  than 600 pips or 0.88 per cent to hit 6.7818 against the USD intraday,  the weakest level since last July.

The sharp weakening of the yuan came after the People’s Bank of China cut its daily fixing by 152 pips to 6.7066 per USD Thursday morning, below the 6.7 per USD mark for the first time ever, showing no signs of propping up the currency.

The yuan depreciated more than 4 per cent in the past month, the worst performance in 31 major currencies globally.

“The latest round of the yuan’s depreciation has been driven by mounting uncertainties from China and overseas market which are damping investors’ sentiment, ” said Guan Tao, an official from China’s State Administration of Foreign Exchange, in an earlier interview.

“The market should not worry too much,” Guan added, “from a historical perspective, as long as the expectation is divided, the foreign exchange market will automatically stabilise the price, and from a long-term perspective, the currency will be supported by the healthy economic fundamentals.

However, the accelerating weakening of the currency suggests a deepening pessimism among investors especially after more signs are pointing to a new round of monetary easing after recent economic indicators pointed to a softening picture amid deleveraging efforts in the past two years.

It’s reported that the central bank has given window guidance to Chinese commercial banks to buy more lower-graded bonds and promised to increase more liquidity injection through Medium Lending Facility (MLF) as the funding support for the purchase.

The China Banking Regulatory Commission on Wednesday urged banks to increase lending, in particular to small and micro businesses, as a move in support of the real economy.

The prospect of monetary easing is exerting additional pressure on the currency and if the central bank does not step in, the yuan is expected to weken further, said Zhou Hao, emerging market economist at Commerzbank.

The pessimism is echoed by Tommy Xie, economist at OCBC Bank in Singapore. Xie said Chinese central bank is not supporting the yuan’s exchange rate, instead, the bank is becoming more tolerant of and comfortable with the yuan’s depreciation.

The sign of monetary easing is not supporting the yuan, said Xie.

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