SHANGHAI: China’s yuan rose to a two-week high against the dollar as traders cut their exposure to the US currency after the Federal Reserve signalled rate cuts were on the way next year.
After keeping the policy rate steady, Fed Chief Jerome Powell said the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view”, sending the dollar and Treasury yields down.
China’s offshore yuan firmed more than 500 pips in late trade on Wednesday, and was last fetching at 7.1379 per dollar, helped by narrowing in the interest rate gap between China and the US The spot yuan touched its strongest level in two weeks at 7.1265 in morning trade.
The 10-year US treasuries yield broke below 4% and the yield gap between 10-year US and China government bonds narrowed to 1319 basis points, the tightest since the end of July.
The global dollar index fell to a two-week low of 102.596 from the previous close of 102.869.
Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.109 per US dollar, 36 pips firmer than the previous fix 7.1126.
China’s yuan weakens to 3-week low, hurt by deflation signs
The spot yuan opened at 7.1340 per dollar and was changing hands at 7.1299 at midday, 401 pips firmer than the previous late session close.
The yuan currency bounced in November after a lengthy period of weakness this year. It is still down 3.3% for the year, although a broadly weakening dollar and PBOC’s support steps have stabilised the currency in the past two months.
With pressure on the yuan easing, there will be more room for PBOC to ease policy, UBS analysts said in a note.
“Loan growth is still rather slow, so keeping rates low should still be in the agenda,” the analysts said.
New bank lending in China jumped less than expected in November from the previous month, even as the central bank keeps policy accommodative to support a feeble recovery in the world’s second-largest economy.
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