June 27, 2018
Trade fears have returned with a twist, as global market weakness has spread to European banks while safe havens including the yen and sovereign bonds are broadly higher amid renewed risk-off sentiment.
Once again, it started in China where the Shanghai Composite slumped for another session, dropping 1.1%, and falling deeper into a bear market.
The weakness was prompted by a renewed decline in the “weaponized” Yuan, which fell for a 10th consecutive day, matching a record losing stretch, and prompting questions whether Beijing is seeking to retaliate to Trump’s protectionism with another round of devaluation.
As we noted last night, last time the yuan devalued this fast, it unleashed hell on the world’s financial markets
The continued slump in the yuan has stoked concerns that Chinese policy makers are less willing to temper its decline, which may remove an anchor of stability for emerging-market currencies. Still, it may not be all Beijing’s doing as policymakers set the fixing at a level that was stronger than analysts expected on Wednesday, while the decline could have been far worse when at least one major Chinese bank sold the dollar in the onshore market to keep the yuan stronger than 6.6, according to two traders, prompting speculation of intervention.
A foreign-exchange trader in Asia told Bloomberg the offshore yuan ran into a large dollar-seller – possibly an agent bank working for Chinese authorities – after weakening beyond 6.61 per dollar. Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd., said he wouldn’t be surprised if the People’s Bank of China intervened if speculative bets against the yuan grew. “The PBOC may think that fundamentally the yuan should weaken, but the move is too fast in the past week and that could ignite capital outflows,” Ong said. “Any intervention should aim only to…