SHANGHAI: China’s yuan slipped to a two-month low against the dollar on Monday, pressured by contrasting US-China economic fortunes and market expectations that the US Federal Reserve is set to hike interest rates even more for longer.
While the Chinese economy is starting to recover after the ravages of COVID-19, a slew of strong US economic data is pointing to an extended period of Fed monetary tightening, keeping the dollar well supported.
Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.9572 per dollar, 630 pips or 0.9% weaker than the previous fix of 6.8942.
The lower official guidance, the softest since Dec. 30 and the biggest one-day weakening in percentage terms since May, pressured the spot market.
The onshore yuan opened at 6.9590 per dollar and weakened to 6.9734 by midday, 104 pips softer than the previous late session close, and the weakest level since Dec. 29, 2022.
Currency traders said the market is now eyeing the psychologically critical 7 per dollar level as the next target, with the risk that a breach of the mark could stoke expectations of sharp yuan depreciation as well as capital outflows.
“In near term, we see USD/CNY continue to track the dollar’s (movements), with geopolitical tensions keeping volatility high as there was no sign of cooling China-US tensions,” said Lin Li, head of global markets research for Asia at MUFG Bank.
Investors will also closely monitor the February manufacturing data due on Wednesday for more clues on the pace of China’s economic recovery since Beijing reopened its borders and ditched its rigorous anti-COVID rules in December.
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Some currency traders said they will shift their attention to the upcoming annual parliamentary gatherings for key growth targets for this year.
“We expect the meeting to set the GDP growth target at ‘around 5%’ with supportive macro policies … Restoring confidence, innovation, and self-reliance in supply chain will be the key policy focus,” said Wang Tao, head of Asia economic research at UBS.
Wang expects a reduction to banks’ reserve requirement ratio (RRR) and a marginal cut to the lending benchmark loan prime rate (LPR), but ruled out a policy rate cut.
Separately, the central bank reiterated in its quarterly monetary policy implementation report that it will focus on supporting domestic demand and stabilising economic growth.
By midday, the global dollar index rose to 105.253 from the previous close of 105.214, while the offshore yuan was trading at 6.9866 per dollar.
The one-year forward value for the offshore yuan traded at 6.8082 per dollar, implying a 2.62% appreciation within 12 months.