SHANGHAI: The yuan slipped to a 10-day low against the dollar on Monday, after China cut the lending benchmark rate to prop up slowing economic growth, widening the divergence with more hawkish monetary policies in other parts of the world.
China lowered the loan prime rate (LPR) for the first time in 20 months, although authorities remain wary of loosening conditions in the country's highly leveraged property market.
"This will likely be followed by a series of other easing measures, including more reserve requirement ratio (RRR) cuts and rate cuts as well as fiscal stimulus in 2022," said Zhang Zhiwei, chief economist at Pinpoint Asset Management.
Currency traders said Beijing's easing bias, reflected by the LPR cut and reductions to banks' RRR, piled downside pressure on the yuan, as monetary policy divergence with other major central banks undermined China's yield advantage.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a more than three-week low of 6.3933 per dollar, 282 pips, or 0.44% weaker, than the previous fix of 6.3651.
The weaker guidance dragged the spot price lower. The onshore yuan opened at 6.3800 per dollar and eased to a low of 6.3885 at one point, the weakest level since Dec. 10.
It trimmed some losses to trade at 6.3785 by midday, 24 pips weaker than the previous late session close.
Some traders said the yuan was also pressured by a rising dollar, which has found safe-haven support amid the rapid spread of the Omicron coronavirus variant globally and a hawkish Federal Reserve.
A trader at a foreign bank said the Fed's apparent hawkish tone, along with the PBOC's easing stance, is likely to influence market expectations for currencies in the new year.
Larry Hu, chief China economist at Macquarie, who also expects some weakness in the yuan from divergence in US-China monetary policy, notes that relations between the world's two largest economies could be another area of investor concern.
"Our base case is that the year of 2022 is another year of muddle-through, as the latest Biden-Xi meeting suggests that both sides want to avoid an unintended crisis," he said in a note.
Chinese foreign minister Wang Yi said on Monday Beijing welcomed cooperation with Washington if it was mutually beneficial and that global competition should be positive.
By midday, the broad dollar index stood at 96.615, while the offshore yuan was trading 0.12% away from the onshore spot at 6.386 per dollar.
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