Yuan set for worst week in a month amid Covid, monetary policy headwinds

13 Jun, 2022

SHANGHAI: China’s yuan was largely steady against the dollar on Friday but looked set for its biggest weekly drop in a month, pressured by uncertainty around COVID-19 cases in Shanghai and worries over monetary policy divergence with other major economies.

Shanghai will conduct another round of mass COVID-19 testings for residents this weekend, just 10 days after a city-wide lockdown was lifted, unsettling residents and raising concerns about the impact on business.

“While a phased reopening starts from June, the road ahead will remain bumpy as Beijing sticks to its zero-COVID strategy,” said Zhou Hao, senior economist at Commerzbank.

“Overall, there is some marginal easing bias given the slowing economy and the rising financial risks due to the property concerns,” Zhou added, expecting the yuan to finish this year at 6.7 per dollar.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at a one-week low of 6.6994 per dollar, 183 pips weaker than the previous fix 6.6811.

In the spot market, the onshore yuan opened at 6.6899 per dollar and was changing hands at 6.6910 at midday, 10 pips firmer than the previous late session close.

If the yuan finishes the late night session at the midday level, it would have lost about 0.5% for the week, booking the biggest weekly loss since mid May.

Currency traders said the yuan only swung in a tight range of less than 80 pips in morning trade, as investors refrained from making huge bets ahead of the release of US inflation data later in the session, which could guide the pace of Federal Reserve’s monetary tightening.

In contrast to most major economies, market analysts and traders widely believe China may ease further to arrest an slowdown.

“We think CPI inflation will remain below the government’s target of 3%,” economists at Capital Economics said in a note. “This would leave room for the PBOC to ease policy further to support growth.”

Official data showed that China’s consumer price index (CPI) gained 2.1% from a year earlier in May, in line with April’s growth and a modest reading by global standards.

“More easing is needed to support a more stable recovery in domestic demand as external demand is set to slow,” said Liu Peiqian, chief China economist at NatWest.

“We see room for more policy easing in coming quarters and expect the PBOC to cut both benchmark rates and reserve requirement ratio (RRR) moderately in H2 2022.”

By midday, the global dollar index fell to 103.164 from the previous close of 103.223, while the offshore yuan was trading at 6.6973 per dollar.

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