If things were fine when the yuan was 6.99 to the dollar, why did all hell break loose when it hit 7.01?
by traders who speculate on short-term movements in market prices is “cut your losses early”. This doctrine finds expression in the stop-loss—an order to sell a security, such as a company share, automatically when it hits a predetermined price. People being people, stop-loss orders tend to cluster at salient levels, such as whole or round numbers. They might instruct a broker to sell the pound at $1.20, say, or sell Apple at $200.
On the face of it, that looks like an overreaction. If things were fine when the yuan was at 6.99, why did all hell break loose when it reached 7.01? Odder still is the idea that a currency that has only fairly limited use outside China is suddenly a prime mover in global capital markets. Yet China’s heft in the world economy has made it so. The yuan-dollar exchange rate is now the world’s most watched asset price. And “seven” mattered simply because people had come to believe that it did.
The yuan is still a long way from being a free-floating currency. It is further away still from being a global one to rival the dollar. It is not a straightforward business to buy and sell yuan. Traders joke that it is less liquid than the shares of Alibaba, a giant Chinese e-commerce firm, which is listed in New York. Yet despite the constraints, the waxing and waning of the yuan’s value has had a growing influence on the foreign-exchange market and on asset prices more generally.
It is not wholly surprising, then, that President Donald Trump’s trade war with China has bled into a conflict over the yuan-dollar exchange rate. Reports from China in recent months suggested that it had become a sticking point in the stalled trade negotiations. The governor of China’s central bank even dropped a public hint in June that there was no red line at seven.
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