SHANGHAI: China’s yuan touched its lowest level against the dollar in nearly a week on Thursday, as worsening COVID-19 outbreaks across the country dented market confidence ahead of key US inflation data due later in the session.
China reported 9,005 new COVID-19 infections on Wednesday, with millions of residents in the southern manufacturing hub of Guangzhou told to get tested as the city grapples with its worst outbreak so far.
“It is hard to tell whether Guangzhou will repeat the experience of Shanghai in spring this year,” said Ting Lu, chief China economist at Nomura.
“If Guangzhou repeats what Shanghai did in spring, it will lead to a new round of pessimism on China,” Lu said.
Investors are likely to closely monitor lockdown measures in Guangzhou due to the sheer size of the city and for insight into the future of China’s zero-COVID policy, he added. Market hopes for the relaxation of some pandemic restrictions lifted Chinese currency and stock markets last week.
The government imposed a months-long lockdown on the financial hub of Shanghai earlier this year to curb the spread of the coronavirus.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 7.2422 per dollar, 233 pips or 0.32% weaker than the previous fix 7.2189, and the weakest since Nov. 4.
The spot market tracked the official guidance fixing. The onshore yuan opened at 7.2515 per dollar and eased to a low of 7.2747, the softest level since Nov. 4. By midday, the yuan was changing hands at 7.2608, 168 pips weaker than the previous late session close.
“The market narrative is likely to alternate between reopening optimism and paring back of those expectations on lockdown news,” said Duncan Tan, rates strategist at DBS.
“We think it would be appropriate to expect COVID policy easing and reopening process to be gradual and calibrated, meaning that (the) growth recovery outlook would be slow and bumpy.”
Persistent COVID disruptions and mobility restrictions have hurt domestic demand and weighed on the world’s second-largest economy, with the International Monetary Fund cutting China’s full-year growth forecast to 3.2% from 4.4% previously.
China’s yuan dips as fresh COVID outbreaks offset reopening optimism
The projection is far below Beijing’s annual target of about 5.5% set in March.
Traders said they were also keeping an eye on US inflation data later in the day to see whether it will support the case for a slowdown in the Federal Reserve’s aggressive monetary tightening.
The US central bank raised rates last week but signalled it may be nearing an inflection point in what has become the swiftest tightening of US monetary policy in 40 years.
Economists polled by Reuters expect the annual rise in the headline consumer price index to land at 8% for October.
“The yuan continues to take cues from the dollar’s movements,” analysts at OCBC Wing Hang Bank said in a note.
“Investors are likely to stay cautious ahead of the US inflation data, with the yuan trading in a range of 7.26 to 7.27 per dollar.”
By midday, the global dollar index had fallen to 110.245 from the previous close of 110.549, while the offshore yuan was trading at 7.264 per dollar.