SHANGHAI/SINGAPORE: China’s yuan hovered at a two-week low on Monday, pressured by corporate dollar demand and expectations of a further widening of the yield gap with other major economies on bets of more monetary easing in China.
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 7.1380 per dollar, firmer than the previous fix of 7.1418.
The central bank continued its weeks-long trend of setting the midpoint firmer than market projections, seen by investors as a sign of the authorities’ discomfort over recent yuan weakness.
Monday’s official guidance rate was 276 pips firmer than Reuters’ estimate of 7.1656.
In the spot market, the onshore yuan opened at 7.1898 per dollar and eased to a low of 7.1931, not far from a two-week low of 7.1979 hit on Aug. 2.
By midday, the yuan was changing hands at 7.1921, 181 pips softer than the previous late session close.
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Corporate dollar demand remained strong even as authorities remained steadfast in their efforts, including setting firmer-than-expected guidance fix, to counteract the yuan’s weakness, said a trader at a Chinese bank.
Some currency traders said they would pay close attention to trade and inflation data due later this week for more clues on the health of the world’s second-largest economy, a key factor in determining the yuan’s outlook.
“We expect exports to have contracted further last month and imports to remain in contraction, and see the country’s headline CPI registering deflation this July after growth in consumer prices stalled in June,” said Lin Li, head of global markets research for Asia at MUFG Bank.
Many traders and market analysts say the upcoming weak data could prompt the central bank to deliver additional monetary easing measures to support the broad economy.
“Deflationary pressures will fuel calls for PBOC to deliver additional stimulus,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privee.
“We expect at least one reserve requirement ratio (RRR) cut and balance sheet expansion in the third quarter of this year.”
By midday, the global dollar index rose to 102.091 from the previous close of 102.017, while the offshore yuan was trading at 7.2013 per dollar.