Coronavirus fears put trend toward stronger yuan into reverse

By William Clarke
Published: Friday, 31 January 2020

Mounting concern over the effects of the coronavirus outbreak in China are putting pressure on the value of the country’s yuan in global markets, reversing a trend that supported commodity prices earlier this month.

The spread of the disease, with the outbreak centered in Wuhan in Hubei province, has led to the halting of flights to and from China, and to the closure of crucial land borders, including those with Russia and Vietnam.

The effects on commodity markets so far have been muted, due to the fact that Chinese economic activity was already at a near-halt for the lunar new year holiday. But the currency situation was already adding support to dollar-denominated commodity costs.

The Chinese financial markets closed on January 24 for the new year break, which should have ended on January 30. That break has been extended until February 3 due to the coronavirus.

But trading continues in the offshore currency, a market in yuan that is held in Hong Kong, or outside China, and is not subject to currency controls.

According to exchange-rate website Oanda, the offshore yuan was trading at 6.96 yuan to $1 on Thursday, January 30, 1.8% weaker compared with January 20, immediately after the first death from coronavirus was recorded by the Chinese authorities.

The fall in the yuan reversed a trend toward the currency becoming stronger, which had come from a rapprochement between China and the United States as they made preliminary steps toward ending their trade war.

The yuan weakened to more than 7 yuan to $1 at several points in trading on both Thursday and Friday, but averaged a slightly stronger level. A value of 7 yuan to $1 was a key point of resistance that was breached for the first time in more than decade in September 2019, when trade relations with the US were particularly frosty.

The stronger yuan was seen as a sop by Beijing to the US, which has accused China of weakening its currency in order to gain an advantage in international trade.

This more recent fall in the yuan, on the other hand, has been driven by economic concerns over the wider consequences of the coronavirus.

The offshore market is currently trading without direction from the heavily controlled onshore market. It remains to be seen what degree of movement will be seen in onshore markets when trading resumes.

China is a major producer of a wide range of industrial minerals, including titanium dioxide, refractory products, antimony, barite and rare earths, and an importer of others including spodumene and ilmenite. The current situation leaves these markets highly exposed to the dollar-yuan exchange rate.

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