SHANGHAI: China’s yuan inched higher against the dollar on Thursday, helped by Federal Reserve signals that it was moving towards a slower pace of interest rate hikes as well as increased expectations of monetary easing from China’s central bank.
China will use timely cuts in banks’ reserve requirement ratio (RRR), alongside other monetary policy tools, to keep liquidity reasonably ample, state media on Wednesday quoted a cabinet meeting statement as saying.
Analysts at Goldman Sachs said they saw the meeting as a response to increased pressures on the economy as COVID cases rise and that they expect the central bank to deliver an RRR cut in the next few days.
“Despite these supportive measures, we continue to forecast weak activity growth in the rest of the year and the first half of next year,” they said in a client note, adding that they expect China will begin to re-open its economy from the second quarter of next year.
China on Wednesday reported its highest number of daily COVID-19 cases since the start of the pandemic began nearly three years ago, official data showed.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.1201 per US dollar, 80 pips firmer than the previous fix of 7.1281.
In the spot market, onshore yuan opened at 7.1480 per dollar and was changing hands at 7.1401 at midday, 179 pips firmer than the previous late session close.
While traders and analysts said the cabinet’s statement all but cemented a near-term RRR cut, markets were rather anxious about its potential size.
“The question is whether it will be a 25-basis-point or 50 bp cut … A 25 bp cut will offer better flexibility in monetary policy and less disruption in FX outflow pressure,” Stephen Innes, managing partner at SPI Asset Management, said via email.
“It would also align with the last RRR cut of 25bp in April.”
The PBOC’s decision in August to lower key interest rates is widely believed to have acted as a catalyst in acccelerating the yuan’s decline.
The move widened the gap in monetary policy direction with the United States and other major economies which have aggressively hiked rates to tame inflation.
In global markets, the dollar was broadly weaker as investors placed bets on riskier assets following the release of the Fed policy meeting minutes that signalled a slower pace of hikes was in the offing.
Around midday, the global dollar index was trading at 105.779, down from its previous close of 106.076, while the offshore yuan was trading at 7.1442 per dollar.