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Chinese Yuan Weakens Against Greenback, Snaps Three-Day Winning Streak

August 29, 2018 at 18:09 by Andrew Moran

Chinese 100-yuan notesThe Chinese yuan’s recent rally has come to an end, snapping its three-day winning streak on Wednesday. The currency weakened against the American counterpart midweek amid ballooning corporate demand for cheaper US dollars. Can the yuan renew the rally this week ahead of some crucial economic data?

According to Reuters, corporate clients went on a dollar-buying binge as state-owned financial institutions were selling greenback reserves. Traders paused because they were unsure if it was part of the banks’ primary trading patterns or the transactions were conducted on behalf of the People’s Bank of China (PBOC) – the latter seems likely because the central bank does not want the yuan to fall too fast.

The yuan received a boost when the State Bank of Vietnam (SBV) announced that it would allow merchants, consumers, and banks to use the yuan for trading goods along the China-Vietnam border. The central bank did not offer any other details, but analysts believe it is a way to minimize foreign exchange risks.

Transactions can be settled in the yuan beginning October 12. Trade between the two nations tops $100 billion every year.

Meanwhile, financial experts contend that the yuan will continue to stabilize and monetary policy will ease in the coming months, which should allow the MSCI China Index to rise during the same time.

Others, however, suggest the yuan will continue to fall against the greenback because the Federal Reserve is gradually raising interest rates and normalizing monetary policy. Plus, as we have learned in recent months, investors dive into the US dollar as a safe-haven asset at the first sign of global volatility.

Soon after the PBOC reintroduced a currency stabilization method, the China Foreign Exchange Trade System (CFETS) confirmed that banks have already adjusted the counter-cyclical factor in the pricing of the yuan-dollar central parity rate.

The USD/CNY currency pair advanced 0.27% to 6.8209, from an opening of 6.8025, at 18:49 GMT on Wednesday. The EUR/CNY rose 0.31% to 7.9792, from an opening of 7.9544.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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