SHANGHAI: China’s yuan weakened against the dollar on Monday, dragged lower by investor concern over capital outflow and currency depreciation pressure after benchmark yield differentials between the world’s two largest economies turned negative.
Yields on China’s 10-year government bonds fell below US Treasury yields for the first time in 12 years on Monday as investors prepared for more monetary easing on the mainland and a widening divergence between the US and Chinese economies.
Negative yield differentials could raise the risk of money flows out of China at a time the US Federal Reserve has signalled more aggressive monetary tightening this year, traders said.
China’s yuan eases, traders see growing chance of PBOC easing next week
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.3645 per dollar, 8 pips firmer than the previous fix 6.3653.
In the spot market, onshore yuan opened at 6.3650 per dollar and was changing hands at 6.3725 at midday, 81 pips weaker than the previous late session close.
Currency traders said negative yield spread hurt market sentiment, along with higher expectations for domestic monetary easing as early as this week.
“With the (China’s) economy slowing sharply due to lockdowns, policymakers have made it clear that more stimulus is coming,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.
He expects the PBOC could lower the borrowing cost on one-year medium-term lending facility by 10 basis points on Friday, when the central bank is set to roll over such maturing loan.
Shanghai has extended its city-wide lockdown as daily COVID-19 infections continued to climb and hit record highs, prompting market worries over the broad economic fallout.
Investors believe imminent monetary stimulus, even as factory-gate and consumer prices rose faster than expected in March.
“China CPI inflation pressure remains benign and we believe that the PBOC will resume its easing cycle as soon as this month,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“The resurgence of COVID in China is exerting significant downside risk for China growth,” Cheung added.
By midday, the global dollar index rose to 99.927 from the previous close of 99.796, while the offshore yuan was trading at 6.3804 per dollar.
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