Fear Factor Lingers Even After China Moves to Bolster Yuan

Nobody should be fooled. Currencies were looking a lot less vulnerable after China surprised pretty much everyone today by fixing the onshore yuan below 7 per dollar, but the rally across foreign-exchange markets was a fragile one. In fact, only the Taiwanese dollar managed to strengthen more than 0.2% among the Asian currencies, and the Philippine peso, Indonesian rupiah and Malaysian ringgit remained weaker, occupying the bottom three places on the emerging-market scorecard. The rand was the stand-out winner, appreciating for the first time in five days with a 0.6% gain. Stocks were even less impressed though, with China’s Shanghai Composite and South Korea’s Kospi leading the MSCI index lower for a 10th day, the longest losing sequence since June 2015. Meanwhile yield spreads on emerging-market sovereign bonds were an average 1 basis point narrower versus a rising Treasury curve.

The stronger-than-expected fixing, coupled with an announcement that the government would sell yuan-denominated bonds in Hong Kong, came after President Donald Trump labeled China a currency manipulator -- hardly a sign of easing tension between the two trade-war protagonists. So the underlying fear factor is no less prevalent that it was 24 hours ago. And that’s little comfort in the light of the increased vulnerability of emerging markets to the yuan’s moves. Bloomberg’s Netty Ismail shows in a chart today how the correlation between the yuan-dollar rate in the offshore market and the currencies of the developing economies has never been greater.