China's yuan weakens as central bank notches eighth straight softer fixing

SHANGHAI: China's yuan weakened on Thursday after the country's central bank fixed its daily midpoint weaker for an eighth consecutive session, and as the dollar stalled after taking support from Fed official comments over persistent inflationary pressures.

"In the near term, the dollar lacks direction. We still need to watch US Federal Reserve officials' comments and US data," said a trader at a foreign bank, noting that increasing Fed hawkishness could prompt the dollar to continue rising.

Suggestions from two Fed officials that a period of high inflation in the United States may last longer than anticipated lifted the greenback on Wednesday.

Before the market open, the People's Bank of China (PBOC) set the yuan's daily midpoint rate at 6.4824 per dollar, its weakest since May 6. It was the eighth consecutive softer fixing, the longest such streak since August 2019 - a time of sharp escalation in the Sino-US trade war.

Spot yuan opened at 6.4790 per dollar and was changing hands at 6.4804 at midday, 56 pips softer than Wednesday's late session close.

The offshore yuan softened to 6.4822 per dollar, from a close of 6.4780, even as offshore borrowing rates jumped ahead of the end of the first half.

Qi Gao, Asia FX strategist at Scotiabank in Singapore, said Thursday's softer fixing reflected policymakers' intention to stabilise market expectations and prevent one-way speculation.

A rapid strengthening of the yuan, which took it to more than three-year highs in late May, prompted a string of official warnings about one-sided bets on yuan strength. Since June 15, the PBOC has also required financial institutions to hold more foreign exchange in reserve in a bid to temper the yuan's upside.

The combination of official warnings and regulatory tweaks, along with projections from the US Federal Reserve of an earlier-than-expected exit from extraordinary pandemic-era policies have combined to push the yuan down nearly 2% from its peak against the dollar on May 31.

With overall inflation benign and given its desire to avoid a stronger yuan, the PBOC continues to fine-tune its liquidity management, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

On Thursday, the bank conducted a 30 billion yuan liquidity injection through seven-day reverse repurchase agreements, the first time since late February that it has not conducted a 10 billion yuan daily injection. The move pushed interbank rates lower, but did not indicate a change in policy, Cheung said.

"Taking account into (the) PBOC's warnings on (yuan)depreciation risk previously, the Fed's hawkish shift should be largely in line with the PBOC's predictions and we do not expect the PBOC to make a dramatic policy shift accordingly in the near term."