SHANGHAI: China’s yuan weakened slightly on Wednesday as tensions over a visit to Taiwan by US House of Representatives Speaker Nancy Pelosi dampened sentiment.
The People’s Bank of China set the midpoint rate at 6.7813 per dollar prior to the market open, weaker than the previous fix 6.7462. In the spot market, the yuan opened at 6.7585 per dollar and was changing hands at 6.7515 at midday, 15 pips weaker than the previous late session close.
Pelosi’s arrival on Tuesday in Taiwan, which China considers a breakaway province, prompted a furious response from Beijing at a time when international tensions already are elevated by Russia’s invasion of Ukraine.
“Asian markets are likely to trade sideways watching the US-China developments,” said OCBC Bank in a note.
China’s foreign ministry said it lodged a strong protest with the United States, saying Pelosi’s visit seriously damages peace and stability in the Taiwan Strait, while China’s defence ministry said its military has been put on high alert and will launch “targeted military operations” in response.
The risk of escalation once Pelosi leaves the region would be the immediate focus for markets, said Stephen Innes, managing partner at SPI Asset Management.
Yuan hits 11-week low ahead of Pelosi’s expected Taiwan visit
“Beyond the military theatre, the issue to watch once Pelosi returns to the US will be whether the White House talks tough on China.”
The US dollar index eased on Wednesday following a jump overnight, with Federal Reserve officials talking up the potential for further, aggressive interest rate hikes.
On Tuesday, San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans signalled that they and their colleagues remain resolute and “completely united” over getting rates up to a level that will more significantly curb economic activity.
“After all, recent Fed’s speeches suggested that the tightening cycle was far from over before restoring price stability,” said Ken Cheung, Chief Asian FX Strategist at Mizuho Bank.
“Considering that monetary policy divergence between China and the US might continue, China will still face relatively large capital outflow pressure, weighing on the yuan,” wrote Zhang Ming, senior economist at the Chinese Academy of Social Sciences, in a note.
Zhang expected the currency to remain between 6.6 and 7.0 against the greenback in the second half of 2022.
The global dollar index fell to 106.063 from the previous close of 106.241.
The offshore yuan was trading at 6.7605 per dollar.
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