SHANGHAI: China’s yuan eased against the dollar on the first trading day of the year on Tuesday, pressured by rising bets of monetary easing after factory activity reinforced the uneven nature of the recovery in the world’s second-biggest economy.
Official data showed that China’s manufacturing activity shrank for a third straight month in December and weakened more than expected, while a separate private survey showed an expansion at a quicker pace.
“Policy support should remain a tailwind over the coming months,” economists at Capital Economics said in a note.
“The Central Economic Work Conference in early December suggest more fiscal support and monetary easing measures are on the way.” The economists said the latest move by major commercial banks to lower deposit rates should pave the way for further reductions to lending rates.
They are forecasting 20 basis points of policy rate cuts and one more reserve requirement ratio (RRR) reduction in the first half of this year.
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 7.0770 per dollar, 57 pips firmer than the previous fix of 7.0827.
The central bank continued its months-long trend of setting the official guidance rate at levels firmer than market projections seen in 2023, traders and analysts said, a move widely seen by markets as an attempt to keep the yuan stable.
China’s yuan leaps to seven-month high, but set for second yearly drop
On Tuesday, the midpoint fixing was 201 pips stronger than Reuters estimate of 7.0971.
In the spot market, the onshore yuan opened at 7.1072 per dollar and was changing hands at 7.1262 at midday, 284 pips weaker than the previous late session close.
The yuan finished 2023 down 2.8% against the dollar for its second straight yearly drop, dragged down by a sputtering economic recovery and monetary policy divergence with other major economies.
With the US Federal Reserve now signaling that it may start cutting interest rates soon, market watchers expect yield differentials between the world’s two largest economies would start to narrow and alleviate some of the downward pressure on the Chinese currency this year.
Markets are now pricing in an 86% chance of Fed rate cuts to start from March, according to CME FedWatch tool, with over 150 basis points of easing anticipated in the year.
By midday, the global dollar index stood at 101.545, while the offshore yuan was trading at 7.132 per dollar.
Comments