The Chinese yuan and currency-related exchange traded funds were in free fall Tuesday after the People’s Bank of China loosened its hold over the foreign exchange market.
The Chinese yuan ETFs gave up all of their gains this year in one day. On Tuesday, the WisdomTree Dreyfus Chinese Yuan Fund (NYSEArca: CYB) fell 3.2% on over six times its normal trading volume, Market Vectors Chinese Renminbi ETN (NYSEArca: CNY) declined 4.3% and CurrencyShares Chinese Renminbi Trust (NYSEArca: FXCH) dropped 2.3%.
The yuan currency depreciated about 1.9% against the U.S. dollar Tuesday, heading toward it’s largest daily drop ever, after the PBoC set its peg to 6.2298 per U.S. dollar from 6.1162 on Monday, reports Ansuya Harjani for CNBC.
The yuan was hovering around 6.325 to the USD in late afternoon trading.
“It looks as though the weakened trade numbers were the last straw for China’s tolerance of a strong exchange rate in the face of weak global demand for its exports,” Sean Callow, senior currency strategist at Westpac, told CNBC.
Beijing revealed that exports declined 8.3% in July, the largest drop in four months and worse than the expected 1% dip. Exports to the Eurozone plunged 12.3% in July and shipments to the U.S. fell 1.3%.
The sudden shift in its currency policy suggests that Chinese officials are seeking a way to stimulate growth after a series of monetary and fiscal policies failed to significantly bolster the economy.
Additionally, the PBoC’s move may also signal a start to the country’s move toward reforms – many have criticized China’s currency policy, arguing that the central bank has artificially strengthened the yuan. Consequently, with the devaluation, the yuan may be more closely aligned with market actions.