SHANGHAI: China’s yuan slipped against the dollar on Friday, dragged lower by expectations of a further widening in yield differentials between the world’s two biggest economies after major Chinese commercial banks cut deposit rates.
China’s Big Five banks announced that they would cut interest rates on some deposits from Friday, with market watchers widely interpreting the move as an attempt to pave the way for further reductions in policy rates to aid the economy.
“We expect the PBOC to cut its policy lending rates in January 2024,” said Ting Lu, chief China economist at Nomura.
“The lasting disinflationary pressures and a sharp reversal of US rates have lowered the hurdle for the PBOC to cut rates.”
China remains an outlier among global central banks with its bias towards a looser monetary policy as authorities try to shore up a faltering economy.
But monetary tightening in the United States had restrained China’s easing efforts, as further widening in yield differentials between the two countries could pile more downside pressure on the yuan and risk capital outflows.
With the Federal Reserve signalling that tightening measures may end soon, the impact of further monetary easing in China on the yuan should be limited, traders and analysts said.
Signs of deflationary pressure suggested “a weak domestic demand and necessitated further policy easing by the government, to prevent China from sinking into a deeper deflation scenario,” said Lin Li, head of global markets research for Asia at MUFG.
Li expects 20 to 30 basis points of reductions in policy rates in 2024 to help lower mortgage rates and reduce the financing burden for companies.
Prior to 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 7.0953 per dollar, 59 pips firmer than the previous fix of 7.1012.
However, traders and analysts said the central bank continued its months-long efforts of setting midpoint rates at levels stronger than they had projected, and they interpreted it as an official attempt to keep the yuan stable.
Friday’s official guidance was 353 pips firmer than Reuters estimate of 7.1306 per dollar.
In the spot market, the onshore yuan opened at 7.1420 per dollar and was changing hands at 7.1483 at midday, 73 pips softer than the previous late session close.
“Year-end demand for the yuan has not significantly increased,” said a trader at a Chinese bank. “Affected by the adjustments to deposit rate, the yuan has underperformed compared with other non-dollar currencies.”
Chinese exporters traditionally settle more of their foreign exchange receipts in yuan towards the year-end and Lunar New Year holidays for various payments, including year-end bonus handouts to their employees.
Trading was slow ahead of the Christmas and year-end holidays, dealers said, while other traders waited for US inflation data due later in the session.
US inflation has been a key factor in deciding the monetary trajectory of the world’s largest economy, and traders expect the data will provide further clarity on how much room the Fed has to cut interest rates next year.
By midday, the global dollar index fell to 101.827 from the previous close of 101.843, while then offshore yuan was trading at 7.1584 per dollar.
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