China’s yuan set for first weekly gain in three

SHANGHAI: China’s yuan inched up against the dollar on Friday, poised for the first weekly gain in three, as concerns over a possible recession in the United States dampened the greenback.

Currency traders said the yuan benefitted from recession fears that tamed US Treasury yields, with the 10-year note sliding to a two-week low overnight.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7 per dollar, 79 pips firmer than the previous fix 6.7079.

In the spot market, onshore yuan opened at 6.6935 per dollar and was changing hands at 6.6957 at midday, 41 pips firmer than the previous late session close.

If the yuan finishes the late night session at the midday level, it would have gained 0.32% to the dollar for the week, booking the first weekly rise in three.

Some traders said that while global markets were starting to price in the risk of a US recession, which lent the yuan support, domestic market participants were reluctant to bet on a firmer Chinese currency for the time being.

“Our global team is expecting a recession in the US starting from 2Q23,” said Larry Hu, chief China economist at Macquarie.

“If a global recession happens later this year, it could be the last straw for China’s top leaders to give up the growth target.”

China has set an annual growth target of “around 5.5%” in March, and President Xi Jinping vowed this week that the government would “strive to achieve full-year economic targets”.

Falling implied volatility in onshore and offshore yuan suggested markets were awaiting guidance from economic data in June to gauge the pace of China’s recovery from COVID-19 curbs to control outbreaks in several regions this year.

Separately, Marco Sun, chief financial market analyst at MUFG Bank, said seasonal dollar demand from corporates for dividend payments was likely to keep the yuan’s gains in check.

Past experience suggested that such FX demand for dividend handout could “increase depreciation pressure on the yuan,” Sun said, expecting the yuan to weaken to a range of 6.75 to 6.8 per dollar next week.

Overseas-listed Chinese firms typically make dividend payments during June to August, and some of this seasonal demand was delayed due to a two-month long lockdown in Shanghai which lifted on June 1.

By midday, the global dollar index fell to 104.277 from the previous close of 104.431, while offshore yuan was trading at 6.694 per dollar.