Renminbi drops to 2019 low on trade war escalation
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China’s renminbi weakened sharply on Friday to its lowest level this year following an escalation in trade tensions with the US, as President Donald Trump moved to impose additional tariffs on imports of Chinese goods overnight.
The onshore renminbi, which trades 2 per cent in either direction of a daily midpoint set by the Chinese central bank, weakened 0.6 per cent to Rmb6.9374 against the dollar, its weakest level since November.
The offshore renminbi, which trades more freely and had already dropped 0.7 per cent in the previous session, fell a further 0.1 per cent to Rmb6.9590.
The losses, which came as Chinese equities fell, arrived as Mr Trump announced plans to slap a 10 per cent tariff on an additional $300bn worth of exports from the world’s second largest economy in the latest twist in the long-running trade dispute between the two countries.
Analysts said that the lack of progress on trade would weigh on the renminbi, with speculation turning to whether it could break through the psychological 7 mark against the dollar in the near future. That would also breach a widely recognised level that the central bank has staunchly defended during periods of weakness last year and in 2016.
“[The] renminbi is again under pressure to weaken against the backdrop of risk-off sentiment, and [the] dollar-renminbi [exchange rate] is probably testing the 7.00 handle today or in the coming days,” said Hao Zhou, senior economist at Commerzbank. He said the new tariffs were “ like a slap on China’s face as Chinese local media expressed positive tones after the Shanghai talks” on trade earlier this week.
“The deteriorating China growth outlook amid the full-blown trade war [suggests] that the Chinese government would be tempted to allow further renminbi depreciation to support the growth,” said Ken Cheung, Asian foreign exchange strategist at Mizuho. But rather than allowing the renminbi to move above the seven level immediately, “the People’s Bank of China might use the [daily rate fixing] to guide a more gradual renminbi depreciation towards [the] seven handle”, Mr Cheung added.