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Yuan Continues to Slide Against Dollar, PBOC Cuts Bank Reserve Ratio

6/25/2018, 1:43:15 PMBasics of Trading
Yuan Continues to Slide Against Dollar, PBOC Cuts Bank Reserve Ratio

The yuan continued to weaken against the US dollar amid the prospects of a trade war continue to hang over the market and China’s central bank announced plans to free up almost USD108 billion worth of liquidity to shore up the economy.

The People’s Bank of China said on Sunday, June 24, that it would lower the required reserve requirement (RRR) ratio of some banks by 0.5% as of July 5. The current RRR requires large banks to hold 16% of their capital in reserve and smaller banks to hold 14%. China uses the RRR as a tool to manage liquidity in the economy.

The cut had been widely expected but the size of it was something of a surprise. Altogether, the cuts will release as much as CNY700 billion that banks can now use to lend. The PBOC said on Monday that liquidity is at a relatively high level.

The yuan has been sliding against the dollar. It hit a five-month low on Friday against the USD and the PBOC set the reference rate Monday at 6.4893. The Monday reference rate was also the lowest in five months against the USD.

The yuan continued to lose ground against the USD in morning trade in Asia Monday. The USD/CNY pair was trading at 6.5174 as of 10:00 PM ET (2:00 AM GMT), up 0.42%.

The yen strengthened against the dollar Monday morning, with the USD/JPY pair down 0.43% to 109.50.

The US Dollar Index, which measures the greenback against a basket of six major currencies, fell in morning trade and was trading at 94.4960. The USD has been strengthening since April but the looming trade war is starting to create jitters on the market.

Meanwhile, a jump in oil prices helped shore up the Australian dollar Friday. The oil rally and a slight weakening in the USD helped the Aussie regain some losses from earlier in the week.

The Aussie gave up some of those gains against the USD on Monday morning, with the USD/AUD pair up 0.20% to 1.3467.