SHANGHAI: China’s yuan weakened to a one-week low on Friday as the dollar firmed and on rising market expectations of imminent monetary easing to boost sputtering activity in the world’s second-largest economy.
Prior to the market 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 7.1771 per dollar, 1 pip firmer than the previous fix 7.1772.
The official midpoint fixing continued to come in stronger than market projections, traders and analysts said, interpreting it as an official attempt to rein in excess yuan weakness.
Friday’s guidance rate was 1,192 pips stronger than Reuters estimate of 7.2963.
The spot yuan opened at 7.2850 per dollar and fell to a low of 7.2925 at one point, the softest level since Nov.3. By midday, it was changing hands at 7.2923, 83 pips weaker than the previous late session close.
Falling consumer prices in October call for more policy stimulus, at a time when China’s newly approved 1 trillion yuan of sovereign bond issuance has also raised hopes for more liquidity support, market watchers said.
“We continue to expect a 25-basis-point reserve requirement ratio (RRR) cut in the rest of the year for liquidity support while a rate cut could be less likely,” Citi analysts said in a note.
China’s yuan firms as US rates uncertainty drags on dollar
“The central bank could be in a difficult situation, with domestically low inflation and concerns on the exchange rate, as well as risk resolution tasks for real estate and local government debt.”
The interest rate on one-year AAA-rating negotiable certificates of deposit (NCDs), which measure the short-term inter-bank borrowing costs, rose to a near seven-month high of 2.5942%, more than 9 basis points higher than the medium-term policy rate that the central bank charges financial institutions.
“The containment of CNY weakness has thus been cross-purposes to the PBOC’s easy monetary policy path,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
“Moreover, the USD continues to possess a significant carry premium over CNY. The current measures to restrain USD/CNY around 7.30 is consequently likely to be abandoned sooner than later,” Tan said, expecting further RRR and even interest rate reductions before the year-end.
A Reuters poll conducted earlier this month showed that half of the 78 participants forecast a RRR cut in November, while 65% of them predicted such a reduction over the next three months.
Separately, the PBOC is expected to roll over 850 billion yuan worth of medium-term lending facility (MLF) loan next Wednesday. Markets will pay close attention to the amount of liquidity offerings and the borrowing cost to gauge the official stance.
In global markets, the dollar strengthened after Federal Reserve Chair Jerome Powell and a chorus of Fed officials poured cold water on market expectations of a peak in US rates.
By midday, the global dollar index stood at 105.861, while the offshore yuan was trading at 7.2992 per dollar.
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