Yuan edges up as PBOC holds medium rate steady, but RRR cut still expected

SHANGHAI: The yuan edged up against a strengthening dollar on Friday after the Chinese central bank left a key policy rate unchanged, despite the State Council calling for more monetary stimulus to cushion a sharp economic slowdown.

The People’s Bank of China (PBOC) kept borrowing costs of its medium-term policy loans (MLF) steady, as most market watchers had expected.

While markets still expect a cut in banks’ reserve requirement ratios (RRR) as early as Friday, some traders and analysts said the MLF decision reaffirmed views that Beijing will be cautious about announcing fresh easing measures at a time when the US Federal Reserve is preparing to start raising interest rates aggressively this year.

“The issue is particularly concerning as the Federal Reserve is starting to hike rates and Chinese assets are also perceived as riskier in the current economic downturn,” Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, said in a note this week.

“This could put strong depreciation pressure on the RMB,” she said, noting the PBOC may only take small steps to avoid an increase in capital outflows.

Prior to the market opening, the PBOC set the midpoint rate at a near four-month low of 6.3896 per dollar, 356 pips or 0.56% weaker than the previous fix of 6.354.

In the spot market, onshore yuan opened at 6.3756 per dollar and was changing hands at 6.3709 at midday, 79 pips firmer than the previous late session close.

“Cutting both interest rates and reserve requirement ratio (RRR) would certainly bring downside pressure to the currency now,” said a trader at a Chinese bank.

The yield premium between China’s 10-year government bonds and their US counterparts vanished earlier this week, and fast rising US yields continued to pressure the yuan forwards.

The benchmark 1-year dollar/yuan swap points touched a low of 590 points on Friday morning, the lowest level since May 2020.

New York Fed President John Williams said on Thursday that a half-point rate rise next month was “a very reasonable option,” in a further sign that even more cautious policymakers are on board with faster monetary tightening in the United States.

Separately, traders said markets would pay close attention to China’s Q1 GDP and March activity data due on Monday to gauge the early impact from a spate of COVID-19 induced lockdowns in many parts of the country.

A Reuters poll showed that China’s economic growth is likely to slow to 5.0% in 2022 amid renewed virus outbreaks and a weakening global recovery, raising pressure on the central bank to ease policy further. The government has set a growth target of around 5.5% for this year.

By midday, the global dollar index rose to 100.547 from the previous close of 100.321, when the offshore yuan was trading at 6.3825 per dollar.