SHANGHAI/SINGAPORE: China’s yuan weakened to a more than one-week low against the dollar on Wednesday, breaching a key threshold, as rising corporate demand for the greenback pressured the Chinese currency.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.1486 per dollar, 33 pips weaker than the previous fix of 7.1453.
However, traders and analysts said the central bank continued to set the midpoint stronger than their projections, a sign that investors interpreted as the authorities’ rising discomfort over yuan weakness.
“The PBOC has been persistently setting lower-than-expected daily midpoint USD/CNY fixing to remove the one-sided bet on further yuan depreciation against the dollar,” said Lin Li, head of global markets research for Asia at MUFG.
“While the yuan will likely continue to be supported by PBOC’s engagement via fixing, other factors like negative yield spread between China and the US likely will push the yuan to the opposite direction.”
Widening yield differentials with other major economies, especially the United States, along with signs of a faltering domestic economic recovery have piled downside pressure on the Chinese currency.
It has lost more than 4% so far this year to be one of the worst performing Asian currencies.
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In the spot market, the Chinese currency traded in both onshore and offshore weakened past the psychologically important 7.2 per dollar. The onshore yuan eased to a low of 7.2103, the weakest level since July 11.
By midday, it was changing hands at 7.2071, 195 pips softer than the previous late session. Its offshore counterpart was trading at 7.2152 per dollar by midday.
Traders said corporate’s dollar buying interests was very strong on Wednesday to pressure the yuan.
Such FX demand was meant to fulfill overseas-listed Chinese firms’ dividend payments and some companies’ commodities settlements, they added.
“But the pace of depreciation is likely to slow down,” said a trader at a foreign bank, noting market participants were wary of possible dollar selling by the state-owned banks to defend the yuan weakness.
In global markets, the dollar paused its steep decline from last week in the wake of a cooler-than-expected US inflation reading that led to traders pricing in an imminent peak in US rates.
The global dollar index rose to 100.011 by midday from the previous close of 99.941.
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