HONG KONG: China’s yuan firmed on Thursday as investors were relieved by more dovish comments from the US central bank that reined in expectations for more interest rate hikes, boosting sentiment for the yuan and other Asian currencies.
The US Federal Reserve raised interest rates by another quarter of a percentage point on Wednesday, lifting its benchmark overnight rate to the 4.75%-5.00% range.
This led US treasury yields to fall across the curve and weighed on the US dollar, thereby lifting Asian currencies including the yuan, which at one point strengthened to 6.8340 in early trading hours, its strongest since mid-February.
Fed Chair Jerome Powell said the banking industry turmoil presents a risk of a credit crunch with “significant” implications for the economy, and some Fed officials expect another rate increase by the same magnitude by end of this year.
“The US Fed just confirmed that there is an end in sight for interest rate rise, instead of maintaining a hawkish outlook they would take more into consideration” such as the banking sector stress, said Christopher Wong, a FX strategist at OCBC Bank.
The spot yuan opened at 6.8522 per dollar and was changing hands at 6.8498 at midday, 82 pips stronger than the previous late session close and -0.31% from the midpoint.
China’s yuan eases ahead of Fed rate decision
The People’s Bank of China set the midpoint rate at 6.8709 per US dollar prior to market open, firmer than the previous fix 6.8715.
The spot rate is currently allowed to trade with a range 2% above or below the official fixing on any given day.
The global dollar index fell to 102.257, near seven-week lows, from the previous close of 102.346.
But capping the yuan’s upside is uncertainty about whether the country’s recovery could sustain the momentum as shown by previous economic data, as beleaguered property developer China Evergrande attempts to move forward with its $22.7 billion offshore debt restructuring plan, which could reshape investors’ confidence and lift an obstacle clouding China’s economy.
Evergrande’s restructuring news also came as its new-energy vehicle unit said it may have to halt production due to a lack of fresh funding.
“This underlines the fact that the the country’s recovery process is still gradual, far short of a boom situation,” Wong said.
The offshore yuan was trading 0.02% stronger than the onshore spot at 6.8484 per dollar.
The one-year forward value for the offshore yuan traded at 6.6981 per dollar, indicating a roughly 2.24% appreciation within 12 months.
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