Renminbi holds ground against the dollar

The renminbi strengthened against the dollar on Tuesday after China’s central bank tightened its currency trading band for a second straight day.

The People’s Bank of China set the midpoint of the onshore version of the renminbi’s 4 per cent trading band against the dollar at Rmb6.88890 on Tuesday, up 0.2 per cent from Monday.

The renminbi remains near an eight-year low against the US dollar as the election of Donald Trump has intensified longstanding depreciation pressure.

The offshore rate strengthened 0.3 per cent to Rmb6.892 per dollar on Tuesday, as the world’s reserve currency ebbed until stronger-than expected US economic data triggered buying of the dollar in the New York trading session.

The index tracking the dollar against six of its rivals was up 0.1 per cent at 101.45, as the euro slipped below $1.06, after two consecutive sessions of overall decline. The dollar’s sustained run higher since the US presidential election has pushed the index to its highest level since 2003.

The trend of stronger dollar, higher bond yields and record US equity highs is seen weighing on emerging markets, with the risk of rising capital outflows.

“The immediate risk is that relentless capital outflows could weaken currencies and make debt expensive enough to warrant sharp demand adjustment in some EM economies. Those ranked as highly vulnerable in our analysis are clearly under scrutiny at this juncture,” noted analysts at Deutsche Bank.

“China remains in the high-risk category in this iteration. Weighed down by a sharp decline in growth momentum, an overvalued currency, and a heavily-leveraged corporate sector, China continues to struggle in taking steps to correct financial imbalances without undermining the growth dynamic. Rapid credit growth and frothy equity and property markets add to its vulnerability,” said Taimur Baig, chief economist.

Meanwhile, South Africa’s rand was hit by the outlook for sustained political turbulence at the top of the ruling African National Congress party. The currency weakened 2.1 per cent with R13.9889 required for a dollar after its president, Jacob Zuma, survived the most serious threat to his tenure, extending the prospect of uncertainty relating to the likelihood of further challenges to his leadership.

Mr Zuma and his allies in the ANC were said to have thwarted the no-confidence vote at a meeting of its national executive committee in Pretoria after hours of heated argument late into Monday evening. Mr Zuma’s opponents struck after rising concerns that the ANC could lose power for the first time since it overthrew apartheid in 1994, unless it forces Mr Zuma from office well before national elections in 2019, when he is due to step down.

Mr Baig said Deutsche Bank’s “EM vulnerability monitor”, designed to assess the susceptibility of countries to crises, found that “South Africa’s ranking has worsened materially”, saying “political noise” was “particularly relevant in this context”.