SHANGHAI: China’s yuan hovered close to a one-week low against the dollar on Wednesday, pressured by signs of loosening yuan liquidity conditions in the onshore market.
Cash conditions eased towards the year-end after the central bank injected fresh funds into the banking system for six straight trading days to smoothen rising seasonal demand, traders said, adding that the loosening conditions weighed somewhat on the currency.
The volume-weighted average rate of the benchmark overnight repo traded in the interbank market, a gauge that measures the onshore yuan liquidity, fell to 1.4388% on Wednesday, the lowest since September.
The onshore yuan opened at 7.1420 per dollar and eased to a low of 7.1505, not far from a one-week low of 7.1516. By midday, it was changing hands at 7.1494 , 69 pips softer than the previous late session close.
Traders and analysts said activity was generally tepid as many market participants are taking their year-end holidays.
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 7.1002 per dollar, 37 pips weaker than the previous fix of 7.0965.
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.
China’s yuan edges lower as expectations rise for policy easing
Wednesday’s official guidance was 400 pips firmer than Reuters estimate of 7.1402 per dollar.
“Stronger than expected CNY fix continues to signal that the policymakers want the yuan to adjust to reflect recent market developments, which include the soft USD,” Christopher Wong, FX strategist at OCBC Bank, said in a note.
The dollar softness in light of rising expectations that the US Federal Reserve will start cutting rates next year has lent support for the yuan, which has faced downside pressure due largely to a sputtering economic recovery in the world’s second largest economy and yield differentials against major economies.
The yuan had weakened 6.14% to the dollar at one point this year before recouping some of the losses. It was still down about 3.5% against the greenback and looked set for the second straight yearly drop.
“The dynamics of the interest rate differentials, USD yields and USD index could still bring episodes of volatility,” said Wang Tao, chief China economist at UBS.
“The narrowing of US-China yield spread, an expected weakening of the USD, and improvement in confidence about the Chinese economy should all support a modest yuan appreciation against the dollar in 2024,” Wang said, raising her yuan forecast to 7.0 per dollar at end-2024 from 7.15 previously.
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