SHANGHAI: China’s yuan weakened on Friday after an official factory survey showed the country’s manufacturing activity unexpectedly contracted in May, while traders were also cautious ahead of a key US inflation report later in the day.
Prior to the market open, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1088 per US dollar, firmer than the previous fix at 7.1111.
The spot yuan opened at 7.2220 per dollar and was changing hands at 7.2412 at midday, 92 pips weaker than the previous late session close.
The session got off to a shaky start after China’s official purchasing managers’ index (PMI) fell to 49.5 in May from 50.4 in April, below the 50-mark separating growth from contraction and missing a median forecast of 50.4 in a Reuters poll.
The soft outcome kept alive calls for fresh stimulus to boost the economy.
“Today’s PMI disappointments may send a warning sign for growth,” said Lynn Song, chief economist of Greater China at ING.
“If the hard data for industrial activity indeed confirms a slowdown, there could be increased urgency to expedite the rollout of trade-in policies and other policies to support consumption and investment.”
The dollar recovered some losses against peer currencies on Friday after a downward revision to US GDP for the first quarter suggested room for rate cuts this year.
That would partly depend on inflation data, with the Personal Consumption Expenditures (PCE) price index - the Federal Reserve’s preferred price measure - due later in the day likely to provide some clues.
“The balance of risks could be skewed to the upside for the greenback as the Fed had preferred to look for a few more ‘good’ data for better confidence to start easing,” said Maybank analysts in a note.
The dollar index, which measures the currency against six major peers, traded around 104.82 after dipping as low as 104.63 overnight.
The offshore yuan was trading at 7.2543 per dollar.