China’s yuan weakens to 6-month low; steady lending benchmark limits losses

SHANGHAI: China’s yuan fell to a six-month low against the dollar on Wednesday, dragged down by a weaker-than-expected official midpoint fixing and persistent worries over economic growth outlook.

But falls were limited by China surprisingly keeping its benchmark lending rates steady for the third straight month at its April fixing. Markets saw the move as indicating caution by Beijing in rolling out easing measures.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.3996 per dollar, 276 pips or 0.43% weaker than the previous fix of 6.3720.

But Wednesday’s official guidance rate, the weakest since Nov. 12, 2021, came in 143 pips softer than a Reuters estimate of 6.3853.

Markets usually note the PBOC’s daily yuan fixing to gauge the official attitude towards foreign exchange policy. Many currency traders interpreted Wednesday’s weaker-than-expected midpoint as indicating it would allow some weakness in the yuan.

The spot yuan opened at 6.4055 per dollar and fell to a low of 6.4115 at one point, the softest level since Oct. 29, 2021. By midday, it was changing hands at 6.3970, 30 pips weaker than the previous late session close.

Its offshore counterpart also followed the weakening trending to touch a six-month low of 6.4394 before trading at 6.4161 around midday.

China’s yuan softens as dollar rises to two-year highs

Traders said an economic slowdown due to COVID-19 induced lockdowns and rising US yields have piled downside pressure on the Chinese currency.

The yield gap between China’s benchmark 10-year government bonds and their US counterparts stood at -8 basis points (bps), the lowest since 2010, down about 50 bps from the beginning of the month.

Negative yield differentials have allowed dollar strength to “belatedly transmit into the RMB space”, said Terence Wu, FX strategist at OCBC Bank.

China’s vanishing yield advantage and policy divergence with the United States, which is set to raise interest rates aggressively this year, have piled pressure on the yuan and forced the PBOC to ease more cautiously.

“With commodity prices elevated and the USD/CNY just breaching the critical 6.4, the PBOC appears to be concerned about inflation risks and Fed hikes,” Citi analysts said in a note.

“Looking ahead, the monetary policy may take the backseat, and the PBOC will likely exercise restraint in interest rate and reserve requirement ratio (RRR) decisions, but rely more on credit policy to support growth.”

The American investment bank expects a 10 bps interest rate reduction and a 25 bps cut to the RRR this year.

However, some market participants said the yuan was yet to come under strong depreciation pressure, because many currency traders in Shanghai were working remotely, leaving recent trading volume at only about 60% of pre-lockdown levels.

“So, depreciation expectations are also discounted,” said a trader at a foreign bank.

By midday, the global dollar index fell to 100.687 from the previous close of 100.961.