SINGAPORE – The yuan fell sharply on Friday and Chinese shares slid, dragging down markets broadly in Asia and weakening an equity rally spurred by a surprise rate cut in Switzerland that had investors betting on who would ease policy next.
Traders were also on high alert as the yen crept to multi-decade lows despite jaw-dropping efforts by Japanese government officials to support it and the central bank’s historic policy pivot earlier this week.
China’s yuan weakened sharply to a four-month low and broke the psychologically important 7.2 per dollar. It was last nearly 0.4% lower at 7.2243.
The drop prompted the country’s main state-owned banks to sell dollars for yuan in an attempt to stem its decline, sources told Reuters.
The yuan has been pressured by growing market expectations that Beijing needs more stimulus to stabilize the world’s second-largest economy, and by the weaker yen.
The state bank purchase did little to calm investors’ nerves.
The mainland blue-chip index CSI300 and Shanghai Composite index each fell 1%, while Hong Kong’s Hang Seng Index slipped 2%.
“Sentiment (is) very fragile today,” said Wong Kok Hoong, head of equity sales at Maybank, citing concerns over weak earnings at Chinese companies and ongoing problems in the country’s property sector, among other issues.
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 hike by the Bank of Japan (BOJ) this week failed to move the needle on the stark interest rate differential between the US and Japan, keeping the yen under pressure.
Data on Friday showed Japan’s core inflation accelerated in February, but an index measuring the broader price trend slowed sharply, highlighting uncertainty over how soon the central bank will raise interest rates again.
BOJ Governor Kazuo Ueda said the same day that the central bank will eventually reduce its purchases of government bonds, but will temporarily stop doing so.
“The (yen) weakened on the same day as the BOJ 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 against the US dollar would require a narrower interest rate gap between the US and Japan, which is partly dependent on (Federal Reserve) policy.
The weak yen boosted gains on the Nikkei, which on Friday closed up 0.18% at a record high.
PERSPECTIVES OF TARA TARA
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.85%, weighed down by the decline in China, and looked set to end the week with a marginal gain.
The index remains almost 2% higher for the month, riding a rally in its global counterparts on the prospect that global interest rates are likely to be lower by the end of the year.
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 that left investors stepping 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 loosen up, that’s for sure,” said Rob Carnell, ING’s regional head of research for Asia-Pacific. “I would expect this to provide further support if people start looking at more prospects of weight loss.”
BoE Governor Andrew Bailey said Thursday after the central bank’s rate decision that the British economy is moving to the point where rates may start to fall, and two of his colleagues dropped calls for further 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 US Federal Reserve’s decision this week to stick to its projection of three rate hikes this year proved more appropriate than some expected and sent the dollar tumbling, it quickly recouped losses thanks to yet another run from a resilient US economy. 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 turnaround for over a year,” said ING’s Carnell. “It looks very doubtful if you look at how strong the US economy is.
“It just doesn’t seem like there’s an automatic sense that when the Fed cuts rates, there has to be some dollar depreciation if the ECB and other central banks in the G10 in particular are doing the same or maybe even more.”
In commodities, Brent fell 57 cents to $85.21 a barrel, while US crude fell 55 cents to $80.52 a barrel.
Spot gold was down 0.23% at $2,175.60 an ounce, after hitting an all-time high on Thursday.