SHANGHAI: China’s yuan slipped against the dollar on Friday but was on course to snap three straight weeks of declines after Beijing announced a deep cut to bank reserves, sending a strong signal of support for the fragile economy and plunging stock markets.
“China’s support for yuan assets and growth has intensified, but one-time impulses have struggled to alter fundamental dynamics,” Lemon Zhang, FX strategist at Barclays, said in a note.
“A 50-basis-point reserve requirement ratio (RRR) cut with the medium-term lending facility (MLF) rate on hold suggests a preference for liquidity management,” she said, expecting front-end rates to rally while the yuan range trades.
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 7.1074 per dollar, 30 pips weaker than the previous fix of 7.1044.
The central bank continued 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 keep the currency stable.
Friday’s midpoint was 659 pips firmer than a Reuters estimate of 7.1733.
In the spot market, the onshore yuan opened at 7.1730 per dollar and was changing hands at 7.1784 at midday, 38 pips softer than the previous late session close.
If the yuan finishes the late night session at the midday level, it would have gained 0.2% to the dollar for the week, the first weekly gain in four weeks.
Currency traders said the yuan’s movements and broad market sentiment have been largely driven by A shares recently, and the slight yuan weakness in morning trades reflected losses and outflows through the Stock Connect trading link with Hong Kong.
China’s blue-chip CSI300 Index dropped more than 0.5% in morning trade, while the benchmark Shanghai Composite index eased 0.2%.
Chinese stocks had rebounded somewhat earlier this week after the support measures but most analysts say more stimulus is needed to stabilise the shaky economy.
By midday, the global dollar index fell to 103.482 from the previous close of 103.574, while the offshore yuan was trading at 7.1836 per dollar.
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