Market focus shifts towards the daily yuan fixing for the time being

PBOC

The above were the fixings for Monday (yesterday) and Tuesday (today) respectively. At yesterday's fixing, the Chinese central bank set the yuan at above 6.90 per dollar and that was the trigger that allowed markets to take over and push the currency lower.

Today, despite a weaker yuan fix again, the currency rebounded from earlier levels and found more stability as the fixing level did not surpass the 7.00 threshold. At the same time, the PBOC also announced a massive CNH bill issuance in Hong Kong in order to stem any sharp decline in the currency.

So, what should we expect next?

Your guess is as good as mine but if there's one thing to take note in all of this so-called currency manipulation talk, is that if anything else, it is that China has in the past "manipulated" its currency to be stronger than it should be.

All they did yesterday was loosen the chains and let the market take over.

Even today, by intervening with the offshore bill issuance, they're signaling that they're not going to let the currency slide rapidly and risk capital outflows from the country.

If anything else, all this does is reaffirm that China has sent a warning shot to the US in that they are not afraid to fight back in the trade war via unconventional means - since they cannot go tit-for-tat on the tariffs front.

As such, if trade tensions continue to escalate, I reckon it would be sensible to expect a weaker yuan over time but certainly not a sharp depreciation. The PBOC will smooth out the fall in the currency but as long as the trade war remains at large, I don't see much other option for China to respond with to counteract the tariffs imposed.

As for the fixing tomorrow, just watch to see if and when the PBOC begins fixing the yuan beyond the 7.00 per dollar threshold. That will be the next key line in the sand. If the subsequent fixings continue to fall below that, expect markets to ease up on the focus towards the yuan.

That said, everyone should still be mindful about the level above and the current trade situation. We've entered into a new phase of the US-China trade rhetoric and one that moves us closer towards a currency war of sorts.