SOURCE / ECONOMY
Yuan to remain under control: analysts
Global scramble for US dollars drives greenback to multi-year high
Published: Mar 23, 2020 09:39 PM

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The Chinese currency has lately come under downward pressure as a dollar funding squeeze is siphoning liquidity away from global markets, market observers said, adding that the yuan won't get out of control as the economy will stabilize ahead of its global peers due to the nation's effective virus containment. 

The yuan's daily fixing strengthened by 112 basis points to 7.0940 against the US dollar on Monday, still at a multi-year low.

The US dollar index posted its largest weekly rise in 11 years with major non-dollar currencies taking a hit across the board, according to China Lianhe Credit Rating Co.

The Federal Reserve on March 15 made an emergency rate cut that lowered the fed funds target rate to near zero and launched $700 billion worth of quantitative easing. But a scramble for dollar liquidity has prompted a stockpiling of the greenback. As a consequence, the US dollar index touched 103 last week, hitting its highest level in more than three years. 

The yuan, among other emerging' currencies, has accordingly felt the pinch, with both offshore and onshore yuan falling to lows not seen since last year.

The rating agency stressed, however, "with the corona outbreak inside China first contained globally, China's economy would stabilize ahead of its global peers, therefore the fundamentals for the yuan's stable operation won't weaken."

The fundamentals of the Chinese economy lay the very groundwork for its currency to remain stable, Bai Ming, deputy director of the Ministry of Commerce's International Market Research Institute, told the Global Times on Monday.

Fear about the huge hit from the virus onslaught to business activity is contributing to drastic risk-off sentiment, "resulting in the re-pricing of equities, commodities, bonds and currencies," analysts at Moody's said in a note sent to the Global Times on Monday.

"The plateauing of the number of new infections in China will allow for a normalization of economic activity over the second quarter," they wrote, expecting an economic recovery in the second quarter "with factory output likely picking up more quickly than activity in the services sector."

The National Health Commission said Monday that 39 new confirmed cases were reported in the Chinese mainland on Sunday, all involving arrivals from abroad. 

A tally by Johns Hopkins University showed that as of 6pm Beijing time on Monday, total confirmed infections had hit 341,722, with the US becoming the third-most affected economy with 35,224 cases. 

The soaring numbers stoked fears of a US recession. Goldman Sachs economists forecast on Friday an unprecedented contraction of 24 percent in the US economy in the second quarter after a 6 percent fall in the first quarter. The investment bank expected the full-year reading to contract by 3.8 percent on an annual average basis. 

Essentially, swings in the foreign exchange market would still be contingent on the easing of the strain in dollar borrowing, according to Bai. China still has sufficient monetary ammunition at its disposal such as rate cuts and reserve requirement reductions to shore up its economy, but it would refrain from resorting to flood-style stimulus.


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