When the offshore yuan matched its record low last week, it served notice that China’s exchange-rate fixing had returned as a key variable to participants in the $6.5 trillion-a-day global foreign-exchange market.
With Sino-American tensions on the rise again, China’s appetite to allow significant drops in the yuan will affect the day-to-day moves of a whole raft of other currencies. While correlation is lacking over longer periods, last Wednesday showcased the kind of spot impact the yuan can have for others. The offshore yuan slid 0.7% at one point against the dollar in wake of the bilateral flare-up over Hong Kong. Australia’s dollar dropped as much as 1.3%, while the Colombian peso saw a 1.4% drop.
“The yuan is definitely on my radar,” said Stuart Simmons, a senior portfolio manager at QIC Ltd., which manages about A$83 billion ($53 billion). “I use it more as an indicator to take advantage of opportunities in markets.”
Others are making direct bets on the currency. Mansoor Mohi-uddin, a markets veteran of more than two decades, said the yuan is “an increasingly important part of investor FX portfolios.”
“The yuan is in the top two or three currency pairs now that investors will assess for an outlook for global currencies,” said Mohi-uddin. It’s an indicator of global sentiment, and of the trade war, he said.
The yuan’s attention belies its still-small share of global trading. It accounted for 4.3% of trades in a Bank for International Settlements survey last year, roughly one quarter the share of the yen, and still behind the likes of the Australian dollar and Swiss franc. Still, part of that is because of capital controls and limits on the free use of the yuan in global markets.
Indeed, Simmons at QIC said “the controls do introduce concerns of unwarranted risk around your hedging.”
But in a way that, say, Britain’s pound cannot, the yuan can give investors instant insight into the state of U.S.-China ties and, in particular, Chinese policy makers’ willingness to up-the-ante in continuing trade tensions by deploying exchange-rate depreciation as a tool.