SHANGHAI: China’s yuan hovered at a seven-week low against a firmer dollar on Thursday, under downward pressure from expectations that the Federal Reserve is likely to stay on its aggressive monetary tightening trajectory.
Policymakers at the US central bank indicated that curbing unacceptably high inflation would be the “key factor” in how much further rates needed to rise, according to minutes from the latest Fed policy meeting.
Before the market opening, the People’s Bank of China (PBOC) set the midpoint fixing of the yuan at 6.9028 per dollar, 269 pips or 0.39% weaker than the previous fix of 6.8759, the softest since Jan. 4. Thursday’s official fixing came in line with market forecasts.
China’s yuan eases to 7-week low as US rates seen higher for longer
In the spot market, the onshore yuan opened at 6.8950 per dollar and was changing hands at 6.8860 at midday, 40 pips firmer than previous late session close.
“If the onshore spot yuan breaches the psychologically important 6.9 per dollar on Thursday, the next key supportive level would be 6.95,” said a trader at a Chinese bank, adding that some of his peers were betting the yuan could soon test the 7 per dollar mark if weakness persisted.
Some analysts and market participants believe a breach of 7 yuan per dollar could trigger strong expectations of depreciation and raise a risk of capital outflow.
The market is looking towards the annual parliamentary gathering while also awaiting economic data for January and February to gauge the health of the economy and the key goals for this year.
January-February data, including imports and exports, will be released in March. January data will be released only in aggregation with February data, because the Lunar New Year holiday shifts between the two months from year to year.
“China reopening optimism appears to be softening as investors are awaiting the economic data releases for first two months as well as the fresh policy guidance at the National People Congress (NPC) in March,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
A sharp jump in short-term Chinese bond yields in response to a swift dropping of pandemic curbs may be premature, analysts say, pointing to the central bank’s policy intent and its attempts to douse speculation of early tightening.
“We expect one more rate cut and one more reserve requirement ratio (RRR) cut,” economists at JPMorgan said in a note. An interest rate cut, possibly in April, could be justified by benign inflation and a probably low growth in first-quarter gross domestic product, they said.
The PBOC most recently cut interest rates in August and the RRR in December.
At midday, the global dollar index stood at 104.413, while the offshore yuan was trading at 6.8904 per dollar.
The one-year forward value for the offshore yuan traded at 6.7179 per dollar, implying a 2.57% appreciation within 12 months.
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