SHANGHAI: China’s yuan was largely flat on Monday, with support from strong export data over the weekend countered by growing expectations of more aggressive US monetary tightening.
The dollar held gains against its major trading partners as US job growth unexpectedly accelerated in July, raising market expectations for another 75-basis-point hike at the Federal Reserve’s Sept. 21 meeting.
Dollar strength and Sino-US tensions over Taiwan after US House of Representatives Speaker Nancy Pelosi’s visit to the island last week are likely to continue weighing on market sentiment, traders said.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7695 per dollar, 290 pips or 0.43% weaker than the previous fix 6.7405.
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In the spot market, the onshore yuan opened at 6.7600 per dollar and was changing hands at 6.7633 at midday, 3 pips weaker than the previous late session close.
The downside pressure was somewhat offset by China’s upbeat July trade data which offered an encouraging boost to the economy as it struggles to recover from a COVID-induced slump. Exports grew a surprising 18% from a year earlier, the fastest rise so far this year.
“Despite all the concerns we have over recession risks and a resultant downswing in China’s external demand, trade growth so far this year has been much more robust than expected,” said Chen Jingyang, Asian FX strategist at HSBC.
“We still hold the view that China’s trade surplus will eventually narrow, should the global economy slow and domestic demand growth pick up pace,” Chen added, noting exporters’ large FX revenues and under-hedged positions should make the yuan less affected by the dollar’s movements in the near term.
The forwards market was pressured by stronger expectations for the Fed to deliver a third 75-basis-point interest rate hike next month.
Rising US Treasury yields widened premiums over their Chinese counterparts. One-year dollar/yuan swap points touched a new 11-year low of -880 points.
Analysts believe the yield gap, in light of monetary policy divergence between the world’s two largest economies, would continue over the remainder of the year.
“The policy differential with the US will remain wide in H2 2022,” Carlos Casanova, senior Asia economist at UBP, said in a note.
“Compounded with a narrowing of the trade surplus, as external demand (weakens) in the coming months, this could exert depreciatory pressures on the (yuan) towards 6.90-6.95 by year-end.”
At midday, the global dollar index stood at 106.561, while the offshore yuan was trading at 6.7697 per dollar.
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