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SHANGHAI: China’s yuan swung wildly on Friday, touching a 1-1/2-year low before recovering its losses by the domestic close, but it remained on track for its biggest monthly drop in nearly two years as risks to the economy grow.

Global investment houses rushed to cut their yuan forecasts, with optimism souring amid extended COVID-19 lockdowns in many Chinese cities and expectations for aggressive US interest rate rises starting next week.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at a 1-1/2-year low of 6.6177 per dollar, 549 pips or 0.83% weaker than the previous fix of 6.5628.

But analysts and traders said the official guidance rate mostly came in line with market projections this week. Any big discrepancies between their forecasts and the PBOC’s fixing are closely watched by investors for clues on possible shifts in foreign exchange policy.

In the spot market, the onshore yuan weakened to a low of 6.6520, the weakest level since Nov. 5, 2020. But it later reversed course to finish the domestic session at 6.5866 per dollar, up 389 pips or 0.6% from the previous late night close of 6.6255.

Its offshore counterpart traded at 6.61 per dollar around 0830 GMT.

If the onshore yuan finishes the late night session at the domestic closing level, it would still book a monthly loss of 3.75% against the dollar, the biggest monthly drop since August 2019, when tensions between the world’s two largest economies intensified.

The sharp intra-day turnaround in the yuan came after the Politburo, a top decision-making body of the ruling Communist Party, said China will step up policy support to stabilise the slowing economy. Though it offered no details, it helped shore up sentiment in the yuan and battered Chinese stock markets.

“The most important message is a change of policy priority,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

“In the past few weeks the top priority seems to be containing Omicron outbreaks. Now the goal is to balance containing outbreaks and economic growth.” The official remarks offered some relief for financial markets, after many investors had raised doubts about China hitting this year’s growth target of about 5.5% as a wave of COVID-19 induced lockdowns weighed on activity.

While the central bank has yet to show much apparent discomfort over the recent yuan slide, despite a reduction to the amount of foreign exchange banks must set aside as reserve earlier this week, some investors were worried that authorities could step in any time soon.

Several traders said they received a growing numbers of queries from their corporate clients about liquidating their dollar holdings on Friday.


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