China’s yuan eases as dollar lifted by expectations for accelerating inflation

SHANGHAI: The yuan weakened slightly on Tuesday on a softer daily central bank fixing and as the US dollar firmed ahead of data that is expected to show the fastest rise in inflation in more than 16 years.

The divergence in the economic outlook in China and the United States drove the benchmark 10-year Chinese government bond yield below its US counterpart for the first time in 12 years on Monday.

And on Tuesday, the China-US 10-year spread fell as low as negative 6 basis points, and was last about negative 1 basis point, according to Refinitiv data.

Traders and analysts said an increasingly hawkish approach to taming inflation taken by the US Federal Reserve and the accomodative stance taken by the People’s Bank of China are likely to continue to affect the spread, possibly sparking outflows from yuan assets.

“The dollar will probably keep rising and the yuan could correct in turn, (but) for the moment the tempo will be relatively stable,” said a trader at a foreign bank.

Prior to the market open, the People’s Bank of China set yuan’s daily midpoint at 6.3795 per dollar, its weakest fixing since April 6,

Meantime, the dollar index rose back above 100.

China’s yuan weakens after yield premium over US Treasury turns negative

Spot yuan opened at 6.3740 per dollar and was changing hands at 6.3701 at midday, just 6 pips weaker than Monday’s late session close. The offshore yuan edged higher to 6.3797 per dollar from a close of 6.3899 on Monday.

Bond traders and economists expect the People’s Bank of China to cut interest rates as early as this Friday, when 150 billion yuan ($23.55 billion) worth of medium-term policy loans are due to mature.

Relatively stable market sentiment makes divergence in Chinese and US monetary policy “affordable”, said Ken Cheung, chief Asian FX strategist at Mizuho, adding that controlled weakening of the yuan “should do more good than harm” to China’s economy.

“The resurgence of COVID and recent lockdowns in first-tier cities are jeopardising China growth outlook. More stimuli and easing are needed to counter the downside risks and the PBoC should front-load its easing measures before the Fed’s aggressive tightening crowds out PBoC’s policy room,” he said.

Some Shanghai residents stepped out of their homes for the first time in more than two weeks on Tuesday, as the city took tentative steps towards easing a COVID-19 lockdown amid mounting worries over the economic impact of the strict curbs.