Tariffs spur record dollar-yuan currency trading

A new product offering new opportunities and promoting active trading in the currency pair on a free and open market will also encourage transparency, Zhu said, adding that will mean China is less at risk of being called a “currency manipulator,” Zhu said.

Even though the Asia Pacific Exchange is privately held, it does not shy away from promoting China’s national agenda. That includes helping China internationalize the yuan and contributing to the Belt and Road Initiative — a multi-continent investment regime meant to further Beijing’s ambitions.

The exchange said it hopes to encourage trading in its new currency derivatives product through the design of the weekly contract available in a smaller size that will help nimble hedging during times of market volatility, Zhu said.

The yuan’s weakness is a political hot potato for world’s second-largest economy amid its trade dispute with Washington.

U.S. President Donald Trump often accuses China of keeping its currency weak so that its exports will be cheaper and therefore more competitive.

China has been criticized for letting its currency fall, but strategists say the country actually has worked to prop the currency up since it got close to the key level of 7 yuan per dollar. The leadership in Beijing has tried to stem capital outflows, which typically accelerate when its currency weakens.

China’s central bank sets a daily exchange rate for the yuan based on recent prices and allows trading against the dollar in a band that could be as much as 2 percent above or below that level.

The dollar-yuan pair is currently trading around 6.95 yuan per dollar. Analysts say the Chinese central bank is trying to keep the currency pair from breaching the psychologically important level of 7 yuan per dollar, ahead of a highly-anticipated meeting between Trump and Chinese President Xi Jinping at the G-20 in Buenos Aires, Argentina later this month.

Recently, the Treasury Department refrained from calling China a “currency manipulator,” a designation that’s been threatened by multiple U.S. administrations but not actually applied since 1994.

As speculation abounds that Beijing is propping up its currency, “it remains to be seen how aggressively China can defend the (onshore and offshore yuan) through direct (foreign exchange) intervention before stoking concerns about reserve adequacy given the constraints of a huge debt bubble and slowing economic growth,” Trinh wrote. “In contrast to 2015/16, there is now more risk from foreign investor portfolio investment and FDI (foreign direct investment) taking flight or drying up.”

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