The trade war initiated by US President Donald Trump continues to escalate, the Chinese yuan and U.S. Treasury bonds have suffered a huge blow, and Donald Trump has launched the currency and bond markets.
After Wednesday's offshore counterpart fell to record levels overnight, China's yuan dropped its level to its weakest level in more than 17 years on Wednesday.
Lu Guoyuan completed the domestic fair at a price of 7.3498 per US dollar, the weakest since December 2007.
See also: China hits 84% tax after Trump doubles U.S. tariffs
President Trump's “reciprocity” tariffs on dozens of countries came into effect on Wednesday, including a 104% tariff on Chinese goods.
China's top leaders met on Wednesday to eliminate measures to promote the economy and stabilize the capital market, people familiar with the matter said.
Sources told Reuters that China's central bank does not allow Sharp Yuan to decline and that it requires major state-owned banks to reduce dollar purchases.
Trends caused by Chinese goods to us
“Unless rolled back, the latest U.S. tariff hikes mean that Chinese shipments to the U.S. will be cut in half in the coming years, even assuming that the yuan will weaken the yuan to $8 to the dollar,” Capital Economics said in a report to customers.
“This will reduce China's GDP by 1.0-1.5%, depending on the extent of the re-route (exported through other countries). This is greater than we assume, but may further expand financial support.”
Elemental RMB cut losses, with Asian trade down by about 0.7% to 7.3769 yuan per dollar, down more than 1% at the previous session and hitting a record 7.4288 overnight.
The People's Bank of China set a midpoint rate on Wednesday – allowing onshore yuan to trade in 2% bands – at 7.2066 per dollar, the lowest since September 11, 2023.
Based on the fixed level, the element is allowed to lower 7.3507, which is stronger than the 7.3510 low hit in September 2023.
Fixed 1,282 more solid than Reuters estimates, suggesting that central banks are reluctant to see a depreciation of their currency.
According to two people familiar with the matter, Chinese state-owned banks are busy selling dollars in the onshore spot market, slowing down the dollar in the early morning of Wednesday.
Still, both onshore and offshore yuan have fallen by more than 1% so far this month, and they have been weaker since the beginning of the year, under pressure from fears of tariffs.
Trump accused China of manipulating its currency to offset the effects of tariffs on Tuesday.
Economists say a weaker yuan will make exports cheaper and relieve pressure on China’s trade and the broader economy, but a sharp decline may exacerbate unnecessary capital outflow pressure and risk financial stability.
Investors dump treasury bonds, bonds
Meanwhile, U.S. Treasury bonds extended huge losses in Wednesday’s sign, and even the global market avenues released by U.S. tariffs dumped the safest assets, making it untroubling for people to sprint towards forced sales and cash security.
“It's beyond the fundamentals. It's about liquidity,” said Jack Chambers, senior strategist at ANZ in Sydney.
The global 10-year U.S. fiscal yield is a safe haven anchor for the global benchmark, and is outstanding, and long-term bonds are the focus of strong sales of hedge funds, which borrow from, borrow the smaller gap usually between cash and futures prices.
It shot higher, a little over 4.5%, even as traders raised expectations for the U.S. tax rate cuts, and in another signal of dislocation in the market, the dollar violated the euro and yen.
Japan's central bank, the Treasury Department and banking regulators convened an unplanned meeting at 0700 GMT to discuss the move, which canceled some extreme sales.
The 10-year yield rose 16 basis points at 4.41% in Asia, 50 basis points higher than Monday's low.
Since 1981, the 30-year yield has risen by 30-year basis points, or soaring above 5%, which will be the heaviest sell-off.
The sell-off exceeded Treasury bonds and Japan's 30-year government bond yield soared to a 21-year high.
Crisis level approaches the volatility of crisis
“This is the level of volatility in GFC and Covid,” said Mark Elworthy, head of fixed income, currency and commodity trading at Bank of America in Australia. “If the market continues to behave like the past 12-24 hours, if the market continues to behave, hopefully there will be some central bank response in the near future.”
The warning signal has been flashing for several days as the difference between the yields of the interbank stock and the difference between the swap rates collapsed under the weight of bond sales.
The core of hedge funds is because their lenders can no longer tolerate the huge stance of slight differences between cash treasury and futures prices or swaps as markets start tariff headlines.
“When the main brokers start tightening the screws, or I can't borrow more, then these guys will obviously have to sell them,” said Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund based in Singapore.
The so-called “basic trading” is usually the field of macro hedge funds. They rely on selling futures contracts or paying swaps and borrowing money to buy cash treasury to take advantage of slight price differences.
When they abandoned Treasury bonds this week, bond yields soared and were out of sync with swap exchanges. Among the 10-year tenor, the gap has been scored 64 basis points, the largest in the record.
The highest tariff in a century
On Wednesday, a hundred years of U.S. tariffs reached a global market, strategists say the debate on the future of Treasury bonds is wider as the center of the global financial universe is underway.
“The UST sell-off could be a regime shift in the US Treasury no longer a global fixed income haven,” said G10 exchange rate trading strategist Ben Wiltshire.
Others point out that potential changes in global trade flows slow down foreign purchases of U.S. debt in the long run, or that foreign holders may turn sellers into sellers.
“The market is now worried that China and other countries can pour U.S. Treasury bonds into retaliation tools,” said Grace Tam, chief investment advisor at Hong Kong's Kuomintang Paribas Wealth Management.
Regardless, the speed of the sell-off indicates pain.
“The yield on super bonds has exceeded the level before Trump announced the tariffs, which is like panic sales,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management in Tokyo.
- Jim Pollard's additional editor Reuters
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