SHANGHAI: China’s yuan slipped to a more than six-month low against the US dollar on Thursday, after the country’s central bank set a weaker daily midpoint, as corporate dollar buying and expectations of US policy tightening supported the greenback.
Traders said a sharp weakening in the yuan’s offshore counterpart, which also hit a more than six-month low, suggested growing expectations of yuan depreciation, which could drag the onshore yuan still lower.
The spread between the offshore and onshore yuan has widened to around 220 pips from just 7 pips two weeks ago.
“The trend of the yuan is to weaken, but we have to see how the central bank reacts,” said a trader at a Chinese bank.
Another trader at a Chinese bank said that expectations for yuan depreciation had accelerated after the USD/CNY pair rose about its 200-day moving average, and that greater volatility is likely.
The dollar remains near its strongest in more than two years against a basket of peers as US yields march higher amid expectations of more-aggressive tightening by the Federal Reserve.
Reflecting dollar strength, the People’s Bank of China (PBOC) set the yuan’s daily midpoint at 6.4098 per dollar early on Thursday, its weakest since Nov. 11. However, that level was stronger than market forecasts.
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Spot yuan opened at 6.4150 per dollar before weakening to a low of 6.4449 per dollar, its weakest level since Oct. 13. By midday, it was changing hands at 6.4388 per dollar, 188 pips softer than Wednesday’s late session close.
The offshore yuan slipped to a low of 6.4668 per dollar, its weakest since Oct. 6, and stood at 6.4619 per dollar by midday.
“Over the past few sessions, USDCNH has broken out of a gentle falling wedge and risks have tilted to the upside with a potential for a new trend emerging,” analysts at Maybank said in a note, flagging resistance at 6.4950.
Analysts at Tianfeng Securities said that with US real yields near positive territory, the dollar index could strengthen in the 100-105 range before the end of May. The gap between COVID-19 control strategies inside and outside of China could also weigh on trade and the yuan’s exchange rate, they said.
The global dollar index was last at 100.558 from Wednesday’s close of 100.39.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan’s value, traded at 6.538.
One-year NDFs are settled against the midpoint, not the spot rate.
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