The Chinese yuan has continued its full on collapse against the greenback as the People’s Bank of China (PBOC) widened the trading band, allowing the market to have a more hands on approach to its direction. The weakening fundamentals and uncertainty surround credit defaults continue to lead the yuan lower.
The first casualty of the credit crisis is Shanghai Chaori Solar Energy Science and Technology Co., which was unable to make a full coupon payment earlier this month. The second corporation in the cross-hairs is land developer Zhejiang Xingrun Real Estate Co., and government officials have indicated the developing company does not have enough capital to pay the 3.5 billion yuan debt liability.
Defaults are almost guaranteed to continue as the PBOC aim to tighten easy credit in hopes to lessen the speculative side of Chinese growth and jump on a path of consistent growth expansion. Daniel Chan, strategist at China Silver Global Investment Consultant Ltd., said “there are also risks that structured product investors will have to unwind long positions.” The slide in USDCHN is expected to continue over the short-term until the scope of China’s credit crunch and fundamentals are somewhat mapped out.
A decline in tonight’s HSBC flash manufacturing PMI will cause the yuan to decline further against the dollar. Economists are looking for a modest rise to 48.7 from 48.5.
The broader Asian FX markets seen their currencies decline as the Federal Reserve foresees a interest rate hike in early 2015. Fed chair Janet Yellen mentioned (likely by accident) that the Fed funds rate could increase to one percent after the asset purchasing programs ends at the end of the year. This was higher than the .75 percent expectations.
“The U.S. rate outlook doesn’t look good for emerging-market currencies, including regional currencies,” said Saktiandi Supaat, FX research at Malayan Banking Bhd. The Federal Reserve’s monthly tapering of asset purchases has been baked into expectations, but the change in the interest rate policy is a game changer. Previously, former Fed chairmen Ben Bernanke gave the markets reassurance that rates would not increase until mid-2015 the earliest. Now, this outlook could be moved up by six-months.