The Chinese yuan strengthened and demand for safe haven currencies like the Japanese yen and Swiss franc fell on Tuesday as China appeared to take steps to stabilize its currency, after the yuan on Monday breached a key level and sparked broad risk aversion.
Stocks and emerging market currencies plunged on Monday and safe havens jumped after Chinese authorities allowed the yuan to break through the psychologically important level of 7 per dollar, its lowest level since the 2008 financial crisis.
Risk appetite improved on Tuesday after the People's Bank of China fixed the daily reference rate for the onshore Chinese yuan at 6.9683, firmer than the expected 6.9871, and below the key 7 rate. The central bank also said it was selling yuan-denominated bills in Hong Kong, a move seen as curtailing short selling of the currency.
The signs that China's not willing to let the CNY continue drifting above 7 is somewhat constructive from a cross asset perspective, said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
Onshore yuan stayed above 7 but gained 0.32% percent to 7.0235 per dollar, after weakening as far as 7.0575 overnight. The offshore yuan also gained 0.70% to 7.0482, down from a high of 7.1397.
Escalating tensions between the United States and China are likely to keep investors cautious with no end in sight to the Sino-U.S. trade war. The U.S. Treasury Department announced late on Monday that it had determined for the first time since 1994 that China was manipulating its currency and said that Washington would engage the International Monetary Fund to clamp down on Beijing.
China's central bank responded on Tuesday that China "has not used and will not use the exchange rate as a tool to deal with trade disputes. It added that Washington's decision to label Beijing as a currency manipulator would "severely damage international financial order and cause chaos in financial markets.
"The fact that the Treasury has labeled China as a currency manipulator, especially since this is an out of cycle move by the U.S. Treasury, suggests that things are pretty antagonistic between the U.S. and China and volatility should continue to remain elevated into the near term," Rai said.
Chinese monetary authorities let the yuan slide past the 7 level so that markets could finally factor in concerns around the Sino-U.S. trade war and weakening economic growth, three people with knowledge of the discussions said on Monday.