China’s yuan strikes 6-month low after PBOC cuts interest rate

SHANGHAI/SINGAPORE: China’s yuan weakened to a six-month low against the dollar on Tuesday, after the Chinese central bank lowered a short-term lending rate to help the economy through its shaky post-pandemic recovery.

The People’s Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00%.

Many market participants had previously expected that China’s central bank might have waited until Thursday, when 200 billion yuan ($27.94 billion) worth of medium-term lending facility (MLF) loans are due to be refinanced.

And, the cut in the reverse-repo rate has firmed up expectations for a reduction in MLF rate this week and a cut in benchmark loan prime rate (LPR) next week.

With US yields steady ahead of this week’s Federal Reserve meeting, and Chinese yields lower following the rate cut, the gap between the two widened and weighed on the yuan.

China’s yuan hits 6 month low on US rate outlook, and China’s weakening recovery

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said the PBOC could be signalling that it is ready “to allow some further RMB depreciation from current level to support exports.”

The onshore yuan weakened to a low of 7.1680 per dollar, the weakest since Nov. 29, 2022. By midday, it was changing hands at 7.1580, 101 pips softer than the previous late session close.

Its offshore counterpart followed the suit and weakened to a fresh six-month low of 7.1782. It last traded at 7.1676 around midday.

“The rate cut did have a big impact on yuan trades,” said a trader at a foreign bank, who reckoned the yuan could weaken further.

Traders and analysts now widely expect the short-term rate cut should herald reductions in longer tenors.

“We expect the MLF rate to be lowered to 2.65% on June 15, followed by 10 basis-point cut in one-year LPR on June 20,” analysts at ANZ said in a note.

“Five-year LPR can be cut at a large scale. The possibility of 25bp cut in the reserve requirement ratio (RRR) is also alive this year, in a bid to lower commercial banks’ liability costs.”