FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that the main focus overnight has been the sharp sell-off in the Chinese equity market which has resulted in broad-based Asian equity and currency market weakness. Key Quotes “Trading in Chinese equites was been halted after the CSI300 index dropped by 7%. Under the new circuit breaker rules which were finalized last month, a 7% intra-day decline closes the market for the rest of the day. It is the largest daily decline in the Chinese equity market since the sell-off in Q3 bringing an abrupt end to the period of relative stability over the last couple of months. The renminbi has also continued to weaken overnight extending the gradual weakening trend which has been in place over the last couple of months. The onshore USD/CNY rate has moved above the 6.5000-level for the first time since May 2011. The spread between the onshore and offshore rates has also continued to widen moving to within touching distance of the highs from early in September. The developments have heightened both investor concerns over outlook for the Chinese economy and renminbi devaluation expectations which are undermining investor risk sentiment more broadly. The yen has been the main beneficiary from the more risk-averse trading conditions in the near-term. The main economic data release overnight from China was the latest Caixin manufacturing PMI survey which revealed that business confidence unexpectedly declined by 0.4 point to 48.2 in December. However, it still remains above the low from September of 47.2. The survey continues to highlight that weakness remains most evident in the manufacturing sector. We expect China’s economy to slow further this year encouraging a weaker renminbi which is most likely through the first half of this year. The People’s Daily has reported as well that China’s economy is likely to experience “L-shaped” growth. The report cited an interview with an unidentified “authoritative” person stating that it is not possible to have a “V-shaped” rebound through short-term stimulus. China’s proactive fiscal policy is expected to be more forceful and prudent monetary policy more flexible to help support economic growth.” For more information, read our latest forex news.