SHANGHAI: China’s yuan weakened to a one-month low against the dollar on Monday, breaching a key threshold, pressured by rising expectations of monetary policy easing and worries over the fast spread of locally transmitted coronavirus cases.
Traders said investors were also concerned about the rapid gains in the yuan’s value against major trading partners. The CFETS basket index has been hovering at all-time highs since last week, forcing the central bank to set weaker-than-expected official fixings in recent sessions.
On Monday, the People’s Bank of China (PBOC) again set the midpoint rate weaker, at a one-month low of 6.3506 per dollar prior to market open, 200 pips or 0.3% softer than the previous fix 6.3306. And it was 117 pips softer than Reuters’ estimate of 6.3389.
The lower-than-expected guidance rate dragged the spot price lower. The onshore yuan opened on the weaker side of the psychologically important 6.35 per dollar for first time since Feb. 15. By midday, it was changing hands at 6.3519, 119 pips weaker than the previous late session close.
A double whammy of slowing economic growth and a resurgence of COVID-19 cases stoked concerns about further yuan depreciation, said a trader at a foreign bank.
Former PBOC adviser Yu Yongding expects China will further cut interest rates to stabilise the economy, the China Securities Journal reported on Monday.
Some market participants expect the PBOC to cut key interest rates including the borrowing cost of the medium-term lending facility (MLF) as soon as Tuesday.
“The latest credit data reinforced our view that a turnaround of the property market is crucial for China to achieve its growth target this year against the backdrop of global uncertainty,” said Tommy Xie, head of Greater China research at OCBC Bank.
“As such, we believe there is still room for China to lower its interest rate. We think China may cut its interest rate as early as March 15 during the next MLF rollover.”
Data on Friday showed new bank lending fell more than expected in February while broad credit growth slowed.
Separately, a buoyant dollar ahead of the Federal Reserve’s policy meeting later this week has also weighed on the yuan.
The Fed is all but certain to begin hiking interest rates from their pandemic lows, with investors also watching projections for the frequency and size of future rate increases.
By midday, the global dollar index rose to 99.255 from the previous close of 99.124, while the offshore yuan was trading at 6.3638 per dollar.
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