China’s yuan stabilises as investors look for ‘red line’ on weakness

SHANGHAI: China’s yuan inched up slightly against the dollar on Wednesday, gaining a foothold following recent volatility as market participants looked for clues about official attitudes towards foreign exchange policy.

COVID-19 lockdowns in dozens of Chinese cities and the narrowing yield advantage against other major economies have weighed heavily on the yuan, pushing it to a one-year low earlier this week. It has since come off that low after the central bank cut the amount of foreign exchange banks must keep in reserve.

Market participants are now looking for the “red line” at which authorities would welcome a cheaper yuan to underpin and economic recovery while also keeping capital outflows under control.

“A weaker CNY would help alleviate pressure on China’s economy and boost export competitiveness amid stronger external competition, at a time when domestic monetary policy is constrained by a hawkish Federal Reserve,” analysts at Standard Chartered said in a note.

Standard Chartered revised its forecast for the yuan to trade at 6.7 per dollar at end of the second quarter, weaker than 6.35 previously.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at a fresh two-year low of 6.5598 per dollar, 8 pips weaker than the previous fix 6.559, but 16 pips firmer than Reuters’ estimate of 6.5614.

Yuan jumps after China’s central bank moves to slow currency’s slide

Apart from the FX RRR reduction, the central bank has not yet expressed any signs of discomfort over recent yuan weakness, with official guidance rates this week mostly in line with market projections, traders said.

In the spot market, the onshore yuan opened at 6.5595 per dollar and was changing hands at 6.5559 at midday, 21 pips firmer than the previous late session close.

Several market analysts and traders said the FX RRR reduction should keep the yuan well above the psychologically important 6.6 per dollar for now, while the US Federal Reserve’s anticipated interest rate hike in May could revive weakness in the Chinese currency.

“As long as the monetary policy divergences continue to widen here, the yuan should continue to weaken and we target the November 2020 high (for USD/CNY) near 6.75,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

By midday, the global dollar index rose to 102.347 from the previous close of 102.303, while the offshore yuan was trading at 6.5851 per dollar.