SHANGHAI: China’s yuan hit its lowest in more than a month against the dollar on Tuesday, reflecting broad strength in the US currency and persistent expectations of monetary easing in the world’s second-largest economy to aid the recovery.
But trading was tepid ahead of China’s fourth-quarter and full-year gross domestic product data on Wednesday, when markets and investors get a clearer picture of the broad economy that has been pressured by weak demand and a property downturn.
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 7.1134 per dollar, 50 pips weaker than the previous fix of 7.1084.
The central bank stuck with its months-long practice of setting the official guidance rate at firmer levels than the market’s projections, traders and analysts said, widely seen as an attempt to prevent the currency from falling too rapidly and sparking capital outflows.
“The onshore USD/CNY fixing has remained significantly lower than spot at around 7.10, signifying policymakers’ desire to anchor RMB stability,” said Chang Wei Liang, FX & credit strategist at DBS. Tuesday’s midpoint was 649 pips firmer than a Reuters estimate of 7.1783.
In the spot market, the onshore yuan opened at 7.1789 per dollar and weakened to a low of 7.1813, the softest level since Dec. 13. It was changing hands at 7.1835 at midday, 115 pips weaker than the previous late session close.
Its offshore counterpart followed the weakening trend to hit a more than one-month low of 7.1955 per dollar, steps away from breaching the psychologically important 7.2 per dollar level. It last traded at 7.1946 by midday.
Uncertainty around when the US Federal Reserve will start cutting interest rates continued to bring volatility to the dollar and other major currencies, including the yuan, traders said.
The market’s still-high expectations of monetary easing in China also weighed on the Chinese currency, traders added, despite the PBOC surprising markets by keeping its medium-term policy rate unchanged on Monday.
“Looking ahead, we still expect the PBOC to cut the policy rate in both Q1 and Q2,” said Larry Hu, chief China economist at Macquarie.
“But property policy, fiscal policy and unconventional monetary policy such as pledged supplementary lending (PSL) are the key to watch for China’s economy in 2024, as they could create demand directly.”
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