China’s yuan eases against dollar on widening yield gap

SHANGHAI: China’s yuan weakened against the dollar on Friday, pressured by a widening yield differential between the US and China, while domestic growth remains subdued.

China left benchmark lending rates unchanged earlier in the day as expected, as further easing would put additional pressure on the yuan, especially with the 10-year US Treasury yield rising sharply in the past week to near 5%.

Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1793 per dollar, only 2 pips firmer than the previous fix of 7.1795.

The spot yuan opened at 7.3105 per dollar and was changing hands at 7.3165 at midday, 66 pips weaker than the previous late session close.

In the past month, the yuan has been capped under the 7.32-level against the dollar as the PBOC continued to employ a stronger fixing bias to limit the downside, said Ken Cheung Kin Tai, chief Asian FX strategist at Mizuho Bank.

The yield gap between China’s 10-year government bonds and their US counterparts stood around 220 basis points, the widest such gap since 2006.

The yuan is being undermined by worsening conditions in China’s external position, said analysts at Barclays, adding that portfolio and direct investment flows are also not helping medium-term prospects.