Yuan's Record Weekly Losing Streak Puts Specter of 7 in Play

(Bloomberg) -- A record string of weekly losses saw China's yuan closing in on the key milestone of 7 per dollar on Friday, a level it hasn't weakened past in more than 10 years.

The currency tumbled as low as 6.8965 per dollar before suddenly paring the move ahead of the official close, when traders said they saw at least one large bank aggressively selling dollars. The yuan is set for an eighth week of declines, the longest such streak since China's modern exchange-rate regime began in 1994. The weakness comes as trade friction intensifies, with Chinese authorities pledging on Thursday to retaliate to any escalation in American tariffs.

The 7 level for the yuan against the dollar is seen as significant as it could be the point where China steps in to arrest the decline for fear further sharp losses could prompt selling and capital outflows, according to analysts. The yuan has been one of the weakest currencies in the world over the past three months.

“Investors are focusing on two trades –- shorting the yuan and China's rates –- and they will keep pushing the yuan weaker until the People's Bank of China steps in to intervene heavily,” said Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore. “If the yuan breaches 7 per dollar, the currency will likely tumble much faster and send shock waves across markets, hurting stocks as well.”

The yuan was down 0.44 percent at 6.8680 per dollar as of 6:31 p.m. in Hong Kong, near its weakest since May 2017. Three traders, who asked not to be identified because they aren't allowed to speak publicly on the matter, said a big bank sold dollars at 6.896 to 6.860 yuan. The offshore-traded yuan weakened 0.12 percent to 6.8899. The Chinese currency is also near the lowest on record against a trade-weighted basket.

The PBOC didn't immediately respond to a fax asking for comment on Friday's currency fluctuations.

China's markets have been rocked by the threat of a trade war with the U.S., which escalated Thursday as the Trump administration warned of more pain unless Beijing changes its economic system. The Asian nation's equity market, one of the worst performing globally this year, has now lost its place as the world's second-biggest to Japan, data compiled by Bloomberg show.

“By pushing the yuan weaker quickly, the market is trying to test the PBOC's bottom line,” Banco Bilbao Vizcaya Argentaria SA's chief Asia economist Xia Le said before the yuan pared its drop. “The central bank hasn't heavily intervened so far, suggesting it believes China is not experiencing disorderly capital outflows, and it's willing to seek a weaker exchange rate amid a slowing economy and the trade war.”

Stocks Extend Losses

China's equity markets were mixed through much of the day before losses accelerated toward the close on the mainland. The Shanghai Composite Index fell 1 percent Friday for a weekly loss of 4.6 percent, while the Shenzhen gauge slid 7.1 percent this week, its worst since early February. It was also its eighth day of losses, the longest run of declines since 2012.

Some more comments on the yuan:

BBVA's Xia:

China is unlikely to let the yuan breach 7 per dollar that easily, as that would send a very strong signal and lead to positioning for much faster depreciation. And that could also result in a situation that the PBOC fears – panic selling and massive capital flight
The PBOC will deploy tools such as stronger fixings and verbal support to stabilize the yuan
If the trade war keeps escalating in a way that's worse than expected, China will still let the yuan break 7 eventually

Ian Hui, global market strategist at JPMorgan Asset Management:

Trade concerns and weaker macro numbers should continue to weigh on the currency
China appears to be willing to let the yuan be driven more by market forces, as it does relieve some pressure on the economy through cheaper exports
Officials will remain wary of letting the yuan weaken too much, as that may risk issues for capital flight and financial stability
Expect the PBOC to take a more balanced approach in managing its currency to maintain domestic financial stability
Can see the yuan weakening further, but don't anticipate it going past 7 against the U.S. dollar this year

Here are some more highlights:

China Dethroned by Japan as World's Second-Biggest Stock Market
As Tencent Sinks, Analysts Cut Everything But Their Buy Ratings
China Stock Market Slice Smallest Versus World Since 2015: Chart
Morgan Stanley Removes Tencent From Hong Kong, China Focus List
Nomura Sees More Yuan Downside Amid Trade War, Monetary Easing
Hong Kong Braces for Biggest Quarter for IPOs Since 2010: Chart
Ross Signals More Tariff Pain Ahead in China Trade Battle

--With assistance from Jeanny Yu.

To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Amanda Wang in Shanghai at twang234@bloomberg.net;Ran Li in Beijing at rli279@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies, Anil Varma

With assistance from Editorial Board