China set its official yuan midpoint at 6.9085 to the US dollar prior to the market opening on Thursday, its weakest level since June 2008.
The yuan has lost over 6% against the dollar so far this year, with the offshore exchange rate falling the sharpest, going past the 6.96 level for the first time since it started trading overseas in late 2010.
Investors are increasingly succumbing to the view that more depreciation lies ahead as the greenback continues to gain strength in the wake Donald Trump’s victory in the US presidential election.
The DXY dollar index reached a 14-year high during Wednesday’s New York trading.
The overwhelming bearishness for the yuan can be monitored in the widening spread between onshore and offshore rate, now at over 300 basis points.
In previous episodes of severe market panic involving the yuan in mid-2015 and early 2016, the spread exceeded 1000 basis points before returning to zero.
Onshore Chinese media appear to be talking up the view that the People’s Bank of China, the country’s central bank, is becoming more tolerant of a weaker yuan.
Several central bank official commentaries indicate that the latest depreciation reflects a correction to an “overvalued” currency and hence there is nothing to be worry about.
The question now is whether 7 yuan to the dollar is the “new normal.”