SINGAPORE -The yuan fell sharply on Friday and Chinese shares skidded, dragging down markets broadly in Asia and dampening an equity rally spurred by a surprise rate cut in Switzerland that had investors wagering on who will ease policy next.
Traders also were on high alert as the yen crept back toward multi-decade lows despite jawboning efforts from Japanese government officials to shore it up and the central bank’s historic policy pivot earlier this week.
China’s yuan weakened sharply to a four-month low and breached the psychologically important 7.2 per dollar level. It was last nearly 0.4% lower at 7.2243.
The fall prompted the country’s major state-owned banks to sell dollars for yuan in an attempt to slow its decline, sources told Reuters.
The yuan has been pressured by growing market expectations that Beijing needs to roll out more stimulus to stabilise the world’s second-largest economy, and by the weaker yen.
The state bank buying did little to soothe investors’ nerves.
The mainland blue-chip CSI300 index and Shanghai Composite index each fell 1%, while Hong Kong’s Hang Seng Index slid 2%.
“Sentiment (is) very fragile today,” said Wong Kok Hoong, head of equity sales trading at Maybank, citing concerns over weak earnings at Chinese companies and continued problems in the country’s property sector, among other things.
Elsewhere, the weakening yen was also back on traders’ radar, as it again hit a four-month trough of 151.86 per dollar and remained a whisker away from a multi-decade low.
A landmark rate increase from the Bank of Japan (BOJ) this week has failed to move the needle on the stark interest rate differentials between the U.S. and Japan, keeping the yen under pressure.
Data on Friday showed Japan’s core inflation accelerated in February but an index gauging the broader price trend slowed sharply, highlighting uncertainty on how soon the central bank will raise interest rates again.
BOJ Governor Kazuo Ueda said the same day the central bank would eventually scale back its government bond purchases, but will hold off on doing so for the time being.
“The (yen) weakened on the same day as the BOJ’s rate hike, indicating that a 10-basis-point hike may be insufficient to attract capital inflows and strengthen the currency,” analysts at Standard Chartered said in a note.
“Achieving (yen) appreciation vs the U.S. dollar would require a narrower interest rate gap between the U.S. and Japan, which is partly dependent on (the Federal Reserve’s) policy.”
The weak yen has bolstered gains on the Nikkei, which on Friday closed up 0.18% at a record high.
RATE CUT PROSPECTS
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.85%, weighed down by the slump in China, and looked set to end the week with a marginal gain.
The index remains nearly 2% higher for the month, riding a rally in its global counterparts on the prospect that global interest rates were likely to be lower by the year-end.
S&P 500 futures rose 0.08% and Nasdaq futures gained 0.12%, while EUROSTOXX 50 futures fell 0.26%.
The Swiss National Bank (SNB) on Thursday became the first major central bank to dial back tighter monetary policy with a surprise 25 bps rate cut, which left investors ramping up bets on a June cut by the European Central Bank (ECB) and the Bank of England (BoE).
“It doesn’t hurt if central banks are easing, that’s for sure,” said Rob Carnell, ING’s regional head of research for Asia-Pacific. “I’d expect this is going to provide further support if people start to eye more prospects of easing.”
BoE Governor Andrew Bailey said on Thursday after the central bank’s rate decision that the British economy is moving toward the point where rates can begin falling, and two of his colleagues dropped calls for additional increases.
Sterling was last 0.15% lower at $1.2641 and headed for a weekly loss of 0.7%.
The Swiss franc fell to a four-month trough of 0.8995 per dollar, extending its more than 1% decline in the previous session.
Although the U.S. Federal Reserve’s decision this week to stick to its projection of three rate cuts this year turned out to be more dovish than some had expected and sent the dollar falling, it was quick to recoup losses thanks to yet another run of resilient U.S. economic data.
The greenback knocked the euro lower on Friday, with the single currency last down 0.2% to $1.0837.
“The market has been completely obsessed with this idea of a dollar turn for more than a year,” said ING’s Carnell. “It looks highly questionable if you look at how strong the U.S. economy is.
“It just doesn’t seem that there’s an automatic sense that when the Fed cuts rates, there’s got to be some dollar easing if the ECB and other central banks in the G10 in particular, are doing the same or perhaps even more.”
In commodities, Brent fell 57 cents to $85.21 a barrel, while U.S. crude eased 55 cents to $80.52 per barrel.
Spot gold was down 0.23% at $2,175.60 an ounce, after hitting an all-time high on Thursday.
