PBOC Launches Day Two Of Currency Cold War Offensive

The People's Bank of China set the yuan's central parity rate against the U.S. dollar at 6.3737 on Thursday, a second sequential major drop and down from Wednesday's 6.3598. This follows a weakened fixing of 6.3598 on Wednesday, down from the record high fixing of 6.3483 on Tuesday, just before the Senate decided to launch the first salvo in the Sino-US trade wars. Surely news of the collapse in Chinese exports will merely reinforce the theme that the USDCNY is in sudden need of devaluation and be a loud slap in the face of the Senate which will now come face to face with its utter worthlessness.  In Hong Kong, the offshore yuan spot rate was fixed at 6.4407 against the greenback on Thursday, compared with Wednesday's 6.4923. The fixing is based on an average of bids from 15 participating banks and is calculated by the Treasury Markets Association, a Hong Kong-based industry group. We are hardly the only ones who noticed the escalation in spot USDCNY wars by the PBOC, which now appears hell bent on showing the US its peg can go lower in addition to higher (inflationary consequences be damned) - from the WSJ: "The yuan fell sharply against the U.S. dollar in early Thursday trade, after the Chinese central bank surprised the market by guiding its currency weaker for the second consecutive day despite the dollar's global weakness." So even as the USD is plunging against the hope-driven Euro, which has soared 600 pips in the past week on nothing, the USD is now jumping against the CNY for no other reason than mere demagogic policy. And this environment in which central bank decisions are all that matter is the one in which traders hope to make a living based on rational market decisions (as otherwise one can flip a coin in Vegas)? Good luck.

From the WSJ

Traders said the unusual move by the People's Bank of China to set the dollar-yuan central parity, a daily reference rate, at a higher-than-expected level earlier Thursday indicated Beijing's continued displeasure following a U.S. Senate vote to pass legislation targeting Beijing's management of its currency.


But traders said they are curious to see how the yuan will perform later in the day, especially given the dramatic reversal of fortunes it experienced Wednesday.


Despite a similarly higher central parity rate Wednesday, the yuan erased all its earlier losses in late trading and ended the session stronger versus the dollar, likely a sign of a continued tug-of-war between the central bank and investors who remain confident in the yuan's long-term appreciation trend.

Bloomberg with more on the reason why this is just the beginning in the inversion direction of the USDCNY move which is sure to generate at least several subdural hematomas in the cranium of one Chuck Schumer:

The risk of a slump in trade may encourage Chinese officials to refrain from further interest-rate increases and add to support for companies after the State Council yesterday announced tax breaks for small businesses. The world is relying on China, the biggest contributor to global growth, to sustain an expansion that was 9.6 percent in the first half of the year.


“The leading indicators from the developed economies indicate that worse will follow” for exports, said Yao Wei, a Hong Kong-based economist at Societe Generale AG.


The yuan slipped 0.42 percent to 6.3849 per dollar as of 10:06 a.m. in Shanghai.


Appreciation of the yuan has weakened competitiveness and exporters are afraid to accept large or long-term orders, the customs bureau said in a statement. “Serious development problems, high unemployment rates and sliding consumer confidence” in the EU, U.S. and Japan, and slowing growth in emerging economies “present severe challenges,” it said.


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