HONG KONG: The yuan weakened on Thursday after China’s posted the slowest annual consumer price inflation in a year, fanning doubts about the pace of economic recovery, at a time when investors are concerned that US interest rates could be raised more aggressively.
The Consumer price index (CPI) for February was 1.0% higher than a year earlier, rising at its slowest since February 2022 and below median estimate for a rise of 1.9% given by a Reuters poll.
The producer price index (PPI) in February fell 1.4% from a year earlier, marking a fifth consecutive month of producer price deflation.
While falling inflation could leave room for the central bank to cut rates, such expectations have fallen by the way side after the a moderate target of 5% annual economic growth was set by the government at the opening of the National People’s Congress on Sunday, said Alvin Tan, head of Asia currency strategy at RBC Capital Markets.
“As the government has set an annual growth target at the lower end of expectations, I don’t expect that authorities would feel compelled to boost growth significantly” through rate cuts or stimulus, said Tan.
The spot yuan opened at 6.9600 per dollar and was changing hands at 6.9671 at midday, 106 pips weaker than the previous late session close and 0.01% away from the midpoint.
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The People’s Bank of China set the midpoint rate at 6.9666 per US dollar prior to market open, weaker than the previous fix 6.9525 and the weakest in over two months. The spot rate is currently allowed to trade within a range 2% above or below the official fixing on any given day.
US Federal Reserve Chair Jerome Powell on Wednesday reaffirmed his message of higher and potentially faster interest rate hikes. He emphasized that debate was still underway with a decision hinging on data to be issued before the US central bank’s policy meeting on March 21-22.
The market is keenly watching whether the Fed will raise its policy rate by 25 basis points or more.
Investors reckon that US rates staying high for longer would weigh on the yuan.
The offshore yuan was trading 0.15% weaker than the onshore spot at 6.9773 per dollar.
The one-year forward value for the offshore yuan traded at 6.7811 per dollar, indicating a roughly 2.89% appreciation within 12 months. The global dollar index was 105.629, slightly below the previous close of 105.658.
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