HONG KONG: The yuan weakened on Tuesday, with investors uncertain if the US Federal Reserve will raise rates this week, widening yield differentials and capping gains in the Chinese currency.
Chinese banks kept the one-year and five-year loan prime rates unchanged on Monday, but analysts differ in their views on whether this signals an end to interest rate cuts in China.
Some, such as UBS, still expect the People’s Bank of China to maintain an easing stance as it expects a 10 basis point cut for the rest of this year. That will put China’s interest rates further behind those in the United States and their yield differentials could put downward pressure on the yuan.
“If liquidity remains ample in China and the US Fed continues to make another interest rate hike, then the yield differentials would widen and keep a lid on yuan appreciation,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
The spot yuan opened at 6.8799 per dollar and was changing hands at 6.8809 at midday, 24 pips weaker than the previous late session close and 0.07% away from the midpoint.
The PBOC set the midpoint rate at 6.8763 per dollar prior to market open, weaker than the previous fix of 6.8694.
China’s yuan eases after reserve ratio cut; Fed decision in focus
The spot rate is allowed to trade in a range 2% above or below the official fixing.
Amid concerns about liquidity at US banks following the collapse of Silicon Valley Bank, there is more uncertainty over what the Fed will do at its two-day policy meeting.
The recent banking turmoil has made either direction a tougher bet. US interest rate futures have priced in just one more 25 basis point hike before a series of cuts beginning as soon as June.
The CME FedWatch tool shows pricing implying about a 74% chance of a rate hike on Wednesday.
The global dollar index rose to 103.344 from the previous close of 103.281.
The offshore yuan was closely tracking the onshore spot at 6.8811 per dollar.
The one-year forward value for the offshore yuan traded at 6.7433 per dollar, indicating a roughly 2.04% appreciation within 12 months.