SHANGHAI: The yuan eased against the US dollar on Friday, as China’s factory activity suggested manufacturing weakness still persisted, while investors awaited the annual session of the country’s parliament for more policy signals.
Data on Friday showed China’s factory activity contracted for a fifth straight month in February, while the expansion in the services sector picked up pace.
The data, albeit distorted by the Lunar New Year holiday, reflect that manufacturing weakness persists and support a cautious view on China’s economic recovery, analysts at UBS said in a note.
The yuan has been capped at 7.20 against the dollar in February, suggesting that China wants the yuan stable when it kicks off the annual meetings next week, said Philip Wee, senior FX strategist at DBS.
China’s NPC will convene on March 5, when investors will pay close attention to a series of economic targets and policy priorities for this year.
“Officials will be cautious in moving interest rate levers given the yuan has struggled since the start of 2023,” said economists at Moody’s Analytics.
China’s yuan slips under economic pressure; US data in focus
“If policy rates don’t fall, we expect the yuan to strengthen this year as the country’s recovery builds and expect rate cuts in the US narrow the interest rate differential,” the economists said.
Prior to the market’s opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1059 per US dollar, 23 pips weaker than the previous fix 7.1036.
The spot yuan opened at 7.1910 per dollar and was changing hands at 7.1947 at midday, 69 pips weaker than the previous late session close.
The dollar was steady on Friday after data showed US inflation remained sticky but easing gradually, keeping alive the chance of the Federal Reserve cutting rates in June.
The global dollar index slightly dropped to 104.085 from the previous close of 104.156.
The offshore yuan was trading 159 pips weaker than the onshore spot at 7.2106 per dollar.