Chinese Yuan weakens on Lira Crisis, Rallying Stocks

The Chinese yuan is weakening on Monday, hurt by the Turkish lira crisis and a rallying stock market. Investors have also combed through recent remarks by the People’s Bank of China (PBOC) about refusing to use the currency as a tool in its trade dispute with the US.

Despite the domestic traders overreacting to start the trading week, sending the Shanghai Composite Index tumbling 1.9%, the index pared most of its losses, trading down just 0.3%. The reversal was fueled by foreign investors buying cheaper yuan-pegged shares. Amid Turkey’s financial crisis, global investors have been selling off emerging market holdings, but China has been able to resist the selloff.
Last week, the US government announced that it would be doubling its tariffs on Turkey’s steel and aluminum exports. This sent the lira reeling, shedding 20% on Friday and another 10% on Monday. President Donald Trump touted the trade levies as a way to put pressure on the lira and boost “our very strong dollar!”
In its second-quarter monetary policy report released on Saturday, the PBOC promised to incorporate macro-prudential policy into its “counter-cyclical tools” to bring stability to the Chinese yuan. The PBOC also lowered its daily fixing to its lowest level since May 2017, reimposing a measure that makes it more expensive to bet that the yuan will diminish against the US dollar. Analysts do expect the PBOC to impose additional measures should the yuan dip further.
The central bank also confirmed that it will not use the currency “as a tool to deal with trade disputes and other external disturbance.” With tit-for-tat retaliation by the world’s two largest economies, the Chinese economy has been sluggish, and the yuan has depreciated as a result. Officials do not foresee an end to the trade conflict as reports suggest Beijing is preparing the national economy for a long-term trade battle.
The USD/CNY currency pair rose 0.68% to 6.8879, from an opening of 6.8469, at 17:49 GMT on Monday. The EUR/CNY advanced 0.49% to 7.8507, from an opening of 7.8124.

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