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SHANGHAI: China’s yuan slipped to nearly 17-month lows against the US dollar on Thursday as widening COVID-19 lockdowns put more pressure on the slowing economy, and as the greenback continued to surge.

The Bank of Japan on Tuesday added fuel to the fire, propelling the dollar higher as it said it would keep interest rates ultra-low and maintain massive stimulus. The dollar-yen pair rose to a 20-year high and the dollar index jumped following the announcement.

The yuan’s slump followed two days of relative stability after the People’s Bank of China (PBOC) on Monday cut banks’ foreign exchange reserve requirements in a move to put a floor under recent steep falls.

It also comes as officials in Beijing embarked on more COVID-19 mass testing aimed at averting a Shanghai-like lockdown that has hobbled economic activity in the country’s financial hub.

With few other signals that the PBOC is uncomfortable with a softer yuan, market participants remain uncertain whether the bank has a clear “red line” for depreciation.

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

On Thursday, the PBOC once again set the yuan’s daily midpoint fixing close to market forecasts, at 6.5628 per dollar. That was its weakest since April 2, 2021.

Onshore spot yuan opened at 6.5622 per dollar and weakened as far as 6.5919, its softest level since Nov. 30, 2020.

By around midday it had recovered some ground to change hands at 6.5895 per dollar, 280 pips or 0.4% weaker than Wednesday’s late session close.

The yuan has fallen nearly 4% against the dollar this month, putting it on track for what could be its biggest monthly drop since China unified official and market exchange rates in 1994.

The offshore yuan weakened to 6.6371 per dollar, its weakest since Nov. 9, 2020. By midday it was trading at 6.6336 per dollar, from a close of 6.5887 on Wednesday.

Ken Cheung, chief Asian FX strategist at Mizuho said that a wide gap between the onshore and offshore yuan indicated more bearish sentiment offshore, adding that thin market liquidity due to the Shanghai lockdown could exacerbate any spillover in negative sentiment into the onshore market.

“If the situation continued, the PBoC would be tempted to take action to anchor the CNH market,” he said.

Ahead of a steep Federal Reserve rate hike expected next month and as a poor outlook for the yen and euro keep the dollar aloft, traders said the yuan has more room to fall in the near term.

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 6.7162.

“The euro and yen are too weak. The dollar index has to rise more,” said a trader at a foreign bank.

The global dollar index rose to 103.438 from the previous close of 102.954.

In the face of increasing economic pressures, traders and analysts continue to await a meeting this week of the Politburo, China’s highest decision-making body, for more signs of economic support.

The State Council has vowed to tackle bottlenecks in supply chains affected by COVID, state media reported on Wednesday.

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