SHANGHAI: China’s yuan fell to a one-year low against a strengthening dollar early on Monday, extending losses after posting its worst week since 2015, as a worsening economic growth outlook drove investor concern that the currency had more room to fall.
Sentiment also took a knock on fears that strict lockdown measures will spread to Beijing, after the capital city required everyone living or working in Chaoyang district to take three COVID-19 tests this week and put more than a dozen buildings under lockdown.
Lockdowns in more than a dozen cities across the country, including the financial hub of Shanghai, have heightened worries over wider disruption to economic activity and raised some doubts whether China will be able to reach this year’s growth target of about 5.5%.
China’s yuan slides to 6-month low as tightening prospects help dollar
“Last Friday’s sharp CNY depreciation may mark an inflection point for further CNY depreciation, (should) market continue to focus on the negative yield spreads of China and near-term weak economic performance,” said Li Lin, head of global markets research Asia at MUFG Bank.
However, authorities have yet to show obvious discomfort about the rapid losses in the yuan, which has weakened about 2.6% since last Monday. And some analysts and traders said a weaker currency could alleviate some pressure on exporters, who are suffering from the lockdowns.
The People’s Bank of China (PBOC) set the midpoint rate on Monday at 6.4909 per dollar prior to market open, the weakest level since August 2021, not far from Reuters’ estimate of 6.4873. In the spot market, both onshore and offshore yuan, touched their weakest levels since April 2021, trading at 6.5433 and 6.6523, respectively, as of 0233 GMT.
Multiple traders said they are seeing growing demand for dollars from their corporate clients, who are betting on further declines in the Chinese currency.
A stronger dollar against the backdrop of aggressive US Federal Reserve tightening, the vanishing Chinese yield advantage and growing economic pressures has weighed on the yuan. “Looking ahead, the next target would be the March 2021 high near 6.5795,” Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a note.
“With monetary policy divergence with the Fed set to widen, we think this yuan move still has legs,” he added, noting the yield spread between the world’s two largest economies would continue to move in the dollar’s favour. Some analysts and traders also noted that recent sell-offs in the stock market added downside pressure on the Chinese currency.
“The knee-jerk reaction may send the USD/CNY even higher to test 6.60 this week,” said Tommy Xie, head of Greater China research at OCBC Bank. “However, we think the room for a disorderly RMB weakness is still limited due to flush dollar liquidity in the onshore market and still resilient goods trade surplus.”
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