SHANGHAI/SINGAPORE: The offshore yuan weakened past 7 per dollar on Wednesday for the first time in five months amid geopolitical tensions and more signs of China’s post-COVID recovery losing steam.
China’s April industrial output and retail sales growth undershot forecasts, official data showed on Tuesday, suggesting the economy lost further momentum at the start of the second quarter and adding to the raft of recent data highlighting a wobbly post-COVID recovery.
The offshore yuan hit 7.0160, while its onshore counterpart eased as far as 6.9988 per dollar, its weakest since early December.
“RMB sentiment deteriorated quickly following the disappointing China hard data for April,” wrote Ken Cheung, forex strategist at Mizuho Bank.
In addition, “the risk of US restrictions on Chinese investment during the G7 meeting this weekend was discouraging to foreign capital inflow,” Cheung said.
Leaders of the Group of Seven (G7) countries are set to discuss concern about China’s use of “economic coercion” in diplomacy.
HSBC said on Wednesday it is switching to a trade idea of selling the yuan against the dollar, “to express our view that things still look challenging for the RMB in the near term.”
But the bank cautioned that China’s forex policy may turn more defensive after the onshore yuan breaks the 7-per-dollar level.
Some panic
In the yuan option market, “there’s some panic” with the offshore yuan weakening through 7 per dollar, UBS said in a note to clients. However, Mizuho’s Cheung said that the People’s Bank of China was unlikely take strong action to defend the 7 level as it no longer represented a psychological barrier.
China’s yuan weakens past key threshold to 2-month low
Mizuho did not see the yuan weakening much further as the market since April has been factoring in the loss of momentum in the economy’s recovery, Cheung said.
An expected pause in the US rate hike cycle later this year, and the peaking dollar “should prove to be supportive to the RMB as well,” he added. Maybank said that it sees yuan softness “as a reflection of some disappointment over China’s data releases recently that suggests weak domestic demand.”
“Geopolitical tensions between the West and China could also drag on the yuan and yuan assets.” Maybank expects the PBOC to start easing rates to aid the economy after June when the US Federal Reserve is expected to pause further rate rises.
Citing “big downside surprises” in the April data, Barclays slashed second-quarter China GDP growth forecast to seasonally-adjusted 1%, from 5% previously.
Comments
Comments are closed for this article.