As inflation batters, global economies, central banks, and the Federal Reserve (Fed) all scrambled to raise rates in an attempt to rein in inflation. Such aggressive moves by the Fed pushed Chinese traders to convert the yuan into the US dollar, which went from strength to strength after the rate hike cycle started globally.
Namely, traders were looking for a haven play; with gold and most other assets not providing such a place, a rush to the US dollar took place. Furthermore, a power play by China’s president Xi during the communist party congress wrapped up on October 22 ensures his reign for the foreseeable future, further depressing the yuan.
Welt’s Holger Zschaepitz took to Twitter on October 23 to proclaim that the yuan had just hit its lowest level since 2007.
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“Xi’s total control in China injects more risk into chaotic world w/Yuan drops to lowest level since 2007. Xi puts all allies on China’s most powerful leadership body. Concern grows that nobody will dare to tell Xi Jinping that he’s wrong.”
He added:
“Markets immediately give direct feedback on what they think of China after the National Congress: China’s Yuan weakens past 7.3 per Dollar an all-time low since the unit started trading in 2010.”
Depreciation pressure
On October 21, the People’s Bank of China (PBOC) set the midpoint rate at 7.1186 per dollar, in an attempt to cap the downside of the yuan.
In the interval, Maybank analysts stated that the Forex markets premium for US/CNH could widen given the caps, claiming that “such signs of depreciation pressure could also spill over to regional EM FX.”
Tensions with the US
Despite the yuan conversion into the US dollar by Chinese traders, the distrust between the two superpowers seems to be at the highest level.
The chips act passed in the US was primarily aimed at bringing chip manufacturing back to US soil; however, it represented a result of more wide-ranging tensions between the US and China.
Recently, US-listed Chinese firms are facing more trouble as well as Nasdaq reportedly halted initial public offering (IPO) for a handful of small companies that had seen returns as high as 2,000% during their first day of trading.
Oversees investors bought up huge amounts of these IPO stocks, allegedly pushing the price up and increasing distrust towards Chinese IPOs on US markets.
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