A Record-Low Yuan May Pressure Other Asian Currencies (Current Issue No. 2920)

    From the beginning of 2018 to July 19, the Yuan weakened by more than 3.5 percent against the US Dollar, representing a new record low of CNY6.73/USD. Factors contributing to a rapid softening of the Yuan over the past few months include heightened risks stemming from the US-China trade war, which have prompted China to switch to more accommodating monetary policy in an effort to ensure economic stability at home and maintain its economic growth. In so doing, China has injected liquidity into its banking system and cut the reserve requirement ratio (RRR) for commercial banks by 1.50 percent this year. Moreover, China has injected additional liquidity into its banking system via medium-term lending facility (MLF) while new Yuan loans grew to CNY1.84 trillion in June, bettering the CNY1.22 trillion reported over the past 12 months. If China sends signals to ease its monetary policy further or its economic performance continues to slow, it is expected that the Yuan will tumble even further and this warrants close monitoring in the future.   

      Regarding the impacts of the weakening Yuan on Thailand, we at KResearch are of the view that the falling Yuan may cause other regional currencies to follow suit via economic link, given that China is a major export market for other Asian countries. Meanwhile, based on the Baht's movements since the beginning of 2018, they have been found to be quite correlated with the Yuan's movements, given their correlation efficient at 0.94. Therefore, there is a likelihood that the Baht will soften along with the Yuan.  Looking ahead, close attention must be paid to the US-China trade issues. If their trade dispute escalates, the Yuan will be at risk of weakening even more and the Asian forex market will likely be plagued by steepened volatility.    ​

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