SHANGHAI: China’s yuan inched lower on Wednesday as worsening COVID-19 outbreaks weighed on sentiment, while investors also anxiously awaited minutes of the Federal Reserve’s policy meeting for more clues on the US tightening trajectory.
China reported 29,157 new COVID-19 infections for Nov. 22, a new high in more than seven months, while the financial hub Shanghai said it would tighten rules for people entering the city to combat the recent COVID-19 outbreak in the country.
“The return of restrictions and mass testing orders on major cities such as Beijing and Shanghai likely confirmed partial reversion to COVID-zero curbs although officials are determined to ensure no ‘excessive’ lockdowns,” analysts at Maybank said in a note.
COVID-induced disruptions and mobility restrictions could hamper business activities and take toll on the broader economy, traders said, noting recent virus prevention measures in Beijing have left many market participants to work remotely from home.
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.1281 per dollar, 386 pips or 0.54% firmer than the previous fix of 7.1667.
In the spot market, the onshore yuan opened at 7.1388 per dollar and was changing hands at 7.1445 at midday, 35 pips or 0.05% weaker than the previous late session close.
Yuan firms as US dollar softens, but COVID case surge caps upside
Traders said market participants’ focus also was on the upcoming Fed minutes due later in the session, with investors looking for any sign of discussions around moderating the pace of interest rate hikes. The Fed’s tightening pace could affect the dollar and other major currencies.
Some currency traders also noted that the Chinese currency might see some upward pressure in the run up to the year-end, when their corporate clients start to convert their FX receipts to yuan for various payment needs and administrative requirements.
“We expect CNY to be supported by a growth recovery, less dovish monetary policy and a solid balance of payments (BOP) position (in 2023),” Becky Liu, head of China macro strategy at Standard Charted, said in a note.
“But likely periodic COVID policy setbacks and wider USD-CNY rate differential will curb CNY strength.”
Liu expects the yuan to trade at 7.1 per dollar at end-2022, 7.05 by Q1 2023, 7.10 by Q2, 7.00 by Q3 and 6.95 by Q4.
Around midday, the global dollar index fell to 107.082 from the previous close of 107.222, while the offshore yuan was trading at 7.1487 per dollar.
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