China’s Yuan toppled from two-year high as trade data surprises

Bloomberg.- China’s yuan sank the most since the aftermath of its shock 2015 devaluation, after data showed the country’s trade surplus more than halved last month, and investors speculated controls on outward cash flows will be eased.

The yuan weakened as much as 1.2 percent in Shanghai, touching as low as 6.3550 per dollar on Thursday. The slump marks a reversal for the managed currency, which acts as an anchor for the wider Asian region and has been rallying amid the dollar’s retreat.

Already down at the start of the trading day, the yuan extended losses after China said the surplus shrank to $20.34 billion from $54.69 billion last month. The surplus was much smaller than economists had expected, and was affected by a surge in imports on rising commodity prices as well as seasonal effects related to the Chinese New Year holiday. A narrower surplus indicates reduced demand for the currency.

The yuan’s pullback wasn’t entirely unexpected, with its climb to a two-year high this week fueling predictions that officials would loosen capital controls put in place since mid-2016 that were aimed at stemming what was then a weakening currency.

Sentiment has also been jittery in Chinese markets, as even though data has been painting a stable economic picture, the government’s campaign against leverage looks to be heating up and rumblings about a possible trade war with the U.S. are becoming louder. This week’s global equity rout hasn’t helped, with the Shanghai Composite Index capping its worst three-day drop in almost two years on Thursday.

“The pressures reached a peak today as the trade data surprised and stocks slumped,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “The result was a stampede with stop losses being triggered and yuan bulls rushing to the exit — the currency will remain pressured in the coming weeks.”

A series of reports in China has spurred the speculation about moves to contain appreciation pressure on the currency:

  • The foreign-exchange regulator said Wednesday that it sees “more noticeable” two-way moves in the yuan, which is managed by the central bank against a reference rate set each day.
  • A front-page commentary in China’s Economic Daily on Thursday said more fluctuations in the currency are likely.
  • The country has resumed its Qualified Domestic Limited Partnership plan after a two-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments, Reuters reported on Thursday, citing people it didn’t identify

The headline trade numbers reflected a still-robust global trade scenario, and healthy domestic demand. Exports rose 11.1 percent in January in dollar terms from a year earlier while imports increased 36.9 percent, fueling the surplus, China’s customs administration said Thursday. Economists said the data may be distorted by the Lunar New Year holiday falling later than it did last year.

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